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Mr. Johannes Wiegand
In the early 1870s, the global monetary system transitioned from bimetallism—a regime in which gold and silver currencies were tied at quasi-fixed exhange ratios—to the gold standard that was characterized by the use of (only) gold as the main currency metal by the largest and most advanced economies. The transition ocurred against the backdrop of both large supply shifts in global bullion markets in the 1850s and 60s and momentous political events, such as the Franco-Prussian war of 1870/71 and the subsequent foundation of the German empire. The causes for the transition have long been a matter of intense debate. This article discusses three separate but interrelated issues: (i) assessing the robustness of the pre-1870 bimetallic system to shocks—which includes a discussion of the appropriate use of Flandreau’s (1996) reference model; (ii) analyzing the transition from bimetallism to gold as a multi-stage currency game played by France and Germany; and (iii) evaluating the monetary debates at the German Handelstag conferences in the 1860s, to present a more complete narrative of the German discussion in the run-up to the transition.
Mr. Johannes Wiegand
In 1871-73, newly unified Germany adopted the gold standard, replacing the silver-based currencies that had been prevalent in most German states until then. The reform sparked a series of steps in other countries that ultimately ended global bimetallism, i.e., a near-universal fixed exchange rate system in which (mostly) France stabilized the exchange value between gold and silver currencies. As a result, silver currencies depreciated sharply, and severe deflation ensued in the gold block. Why did Germany switch to gold and set the train of destructive events in motion? Both a review of the contemporaneous debate and statistical evidence suggest that it acted preemptively: the Australian and Californian gold discoveries of around 1850 had greatly increased the global supply of gold. By the mid-1860s, gold threatened to crowd out silver money in France, which would have severed the link between gold and silver currencies. Without reform, Germany would thus have risked exclusion from the fixed exchange rate system that tied together the major industrial economies. Reform required French accommodation, however. Victory in the Franco-Prussian war of 1870/71 allowed Germany to force accommodation, but only until France settled the war indemnity and regained sovereignty in late 1873. In this situation, switching to gold was superior to adopting bimetallism, as it prevented France from derailing Germany’s reform ex-post.
Ruchir Agarwal and Patrick Gaulé
The advancement of the knowledge frontier is crucial for technological innovation and human progress. Using novel data from the setting of mathematics, this paper establishes two results. First, we document that individuals who demonstrate exceptional talent in their teenage years have an irreplaceable ability to create new ideas over their lifetime, suggesting that talent is a central ingredient in the production of knowledge. Second, such talented individuals born in low- or middle-income countries are systematically less likely to become knowledge producers. Our findings suggest that policies to encourage exceptionally-talented youth to pursue scientific careers—especially those from lower income countries—could accelerate the advancement of the knowledge frontier.
Mr. Antonio Spilimbergo
Research summaries on (1) measuring inflation, and (2) strengthening Poverty Reduction and Growth Facility (PRGF) programs through poverty and social impact analysis (PSIA); country study on Spain; listing of contents of Vol. 53, Special Issue of IMF Staff Papers, summary of recently published IMF book entitled "IMF-Supported Programs: Recent Staff Research"; listings of recent external publications by IMF staff members, IMF Working Papers, and visiting scholars at the IMF during January-August 2006.
Mr. Kenneth Rogoff, Mr. Kenneth Froot, and Mr. Michael Kim
This paper examines annual commodity price data from England and Holland over a span of seven centuries. Our data incorporates transaction prices on seven commodities: barley, butter, cheese, oats, peas, silver, and wheat, as well as pound/shilling nominal exchange rates going back, in some cases, to 1273. We find that the magnitude, volatility, and persistence of deviations from the law of one price have not declined by as much as one might expect. We find this despite lower transport costs, reduced trade protection, and fewer wars and plagues in the modern era. Our analysis is consistent with growing evidence that goods-market arbitrage remains highly imperfect, even today.
Nathan Sussman and Mr. Barry J. Eichengreen
This paper takes stock of the evolution of the international monetary system over the last thousand years. Several points stand out from the analysis. One is the reluctance of governments to embrace radical changes in international monetary relations. Another is the conflict between external and domestic objectives over the cycle, which has been a source of significant tension in the industrial core through much of this century, is now becoming a significant issue for developing countries. Finally, recent developments represent a return to the more market-driven international monetary system that characterized the better part of the preceeding millennium.
International Monetary Fund. External Relations Dept.
Following are edited excerpts from an address given by IMF Managing Director Michel Camdessus at the twenty-fourth annual conference of the International Organization of Securities Commissions (IOSCO) in Lisbon, Portugal, on May 25. The full text is available on the IMF’s website (http://www.imf.org).
Mr. S. E Oppers
This paper formalizes Irving Fisher’s century-old model of bimetallism and adds the important “disequilibrium” dynamics to deal with the long periods during which bimetallic countries were on effective monometallic standards. It resolves a long standing puzzle in the bimetallic literature regarding the remarkable stability of the gold/silver price ratio in the nineteenth century by modeling the bimetallic mint ratio as a regulating barrier to the gold/silver price ratio. It thus provides a clean-cut example of a target-zone model that—in contrast to other such models in the literature—exhibits the main predicted nonlinearities in the data. This is a Paper on Policy Analysis and Assessment and the author(s) would welcome any comments on the present text. Citations should refer to a Paper on Policy Analysis and Assessment of the International Monetary Fund, mentioning the author(s) and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
International Monetary Fund. Research Dept.
This chapter examines if there was a fundamental shift in the demand for international reserves of countries in 1973 because of the change in the international monetary system from one of generally fixed exchange rates to one of greater exchange rate flexibility. Particular attention was also paid to the question whether the relationship between reserves and certain important variables remained stable during the period 1973–1976. The results indicated that there was a shift in the demand for reserves by industrial countries in response to the move to floating, however, that this shift occurred toward the end of 1973 rather than at the beginning of the year. Obviously, there was some lag in the response of these countries to the change in the system; however, the behavior of non-oil developing countries did not appear to be affected by the change. This can perhaps be attributed to the fact that most of these countries continued to peg their currencies to another currency, and thus there was no real change in the exchange rate regime relevant to them.
International Monetary Fund. External Relations Dept.
This paper presents a description of the Project Analysis Course offered by the World Bank’s Economic Development Institute (EDI). The main objective of EDI is to give individuals a general understanding of all the main elements involved in preparing, evaluating, and executing development projects. At the end of the course, EDI expects graduates to be able to help design project studies or to participate in the overall evaluations on which final decisions are heavily based.