Abstract
This chapter focuses on the discount rate policy of the Reichsbank during the gold standard. It analyses by means of econometric techniques the economic factors which influenced the Reichsbank’s decisions to change the official discount rate. It also tries to answer the question of whether the Reichsbank followed the so-called ‘rules of the game’. At the risk of some oversimplification, the ‘rules of the game’ have been interpreted in the gold standard literature in three different ways:
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1.
A narrow interpretation, implying that a central bank followed the ‘rules of the game’ if its main concern was the covertibility of the currency and if it changed the discount rate in response to changes in its liquidity ratios. This interpretation seems to have been adopted by Goodhart (1972) in analysing the behaviour of the Bank of England.
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2.
A second interpretation, implying that a central bank followed ‘the rules of the game’l it changed its domestic assets in the same direction as its foreign assets in a given time interval, thus speeding up the balance-of-payments adjustment process. This interpretation was adopted by Bloomfield (1959);
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3.
A third interpretation, implying that a central bank followed the ‘rules of the game’ if the discount rate was changed so as to lead to an anti-cyclical behaviour of its assets and liabilities. This interpretation was adopted by McGouldrick (1984) in his analysis of the behaviour of the Reichsbank.
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Notes
The difference between the highest and the lowest level of gold holdings as a ratio of average annual gold holdings reached a maximum of 50.6 per cent in 1905 and a minimum of 22.9 in 1892. The difference between the highest and the lowest level of fiduciary notes outstanding as a fraction of average yearly total Reichsbank notes outstanding reached a maximum of 74.6 per cent in 1912 and a minimum of 23.8 per cent in 1877. Variability within the year of notes outstanding increased substan-tially in the second part of the gold standard period. It goes without saying that part of the variability of both assets and liabilities was caused by seasonal factors. A similar variability is observed for the gold holdings and fiduciary notes outstanding of the Bank of England, while it was substantially lower for the other central banks for which comparable data are available.
See Johnson (1958, 1973). For empirical tests for industrial countries in the post-1945 period, see Frenkel and Johnson (1976) and Tullio (1979, 1981).
Changes in domestic assets of the Reichsbank are compared here with the balance of payments defined as international gold flows rather than with changes in foreign assets of the Reichsbank, as in Bloomfield. The two variables were not equivalent because the public held substantial amounts of gold and because the Reichsbank held some foreign ex-change, especially in the latter part of the period. The former compari-son is more relevant when the focus is on the determinants of the balance of navments.
See Balassa (1964).
See Table 1.5 and Figure 1.3.
Owing to fixed exchange rates these ratios can be considered as measures of the real exchange rate. For the real Mark-dollar exchange rate (from 1880 to 1979) see Figure 1.10.
See Figure 2.2.
See Table 1.8.
See Table 2.2.
See Figure 2.2.
Including the growth of the size of the government sector both as a producer of non-traded goods and as a levier of indirect taxes.
It should be further mentioned that the annual real GDP data for France used here have been kindly obtained from Bourguignon and Levy-Leboyer (1984). However, the percentage changes by decade of their data do not correspond with the ones reported by Perroux (1955).
See Morgenstern (1959) Table 2, p. 45.
Regressions of yearly deviations from trend of German industrial production on deviations from trend of German wholesale prices are re-ported below for the two gold standard periods, where a is the intercept and b the coefficient of the independent variable:
Morgenstern found that German and UK short-term market interest rates were in the same phase of the specific interest rate cycle in 71.1 per cent of the months from February 1878 to August 1913 (see Morgenstern, 1959). The German and French rates were in the same phase in 70.4 per cent of the months and the German and the US rates in 64.1 per cent of the months.
The differential is always positive when annual averages are used, because the official rate was the rate charged on loans of varied quality, while the private rate refers to lower risk loans. However, during the period the official rate fell from time to time below the private rate.
McGouldrick finds that during the 6 business upswings the spread as defined here increased by 43 basis points on average. It fell by 42 basis points on average during the 5 downswings.
This is slightly less than half of the size of the coefficients found by Tanzi (1980) for the short-term US interest rates from 1959 to 1975.
Morgenstern (1959) Table 14, p. 93.
Bloomfield showed graphically that this negative correlation between the liquidity ratios and discount rate changes held for most gold standard countries.
The coefficients in the tables are rounded up and their multiplication does not give precisely the figures reported in the text.
Bloomfield (1959) held a similar view.
It would be interesting to pursue this comparison further and analyse the relative merits of one versus the other intermediate objective. This is, however, beyond the scope of this chapter.
A is the first difference operator.
Assuming that the foreign central banks do not fully accommodate the increased demand for currency abroad.
See, for instance, Gregory, Baltagi and Sailors (1984).
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© 1987 Andrea Sommariva and Giuseppe Tullio
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Sommariva, A., Tullio, G. (1987). Monetary Policy and the Determinants of Gold-Flows in Gold Standard Germany: 1876–1913. In: German Macroeconomic History, 1880–1979. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-06591-2_3
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