Money and Prices, 1850–1913

Abstract

In Chapter 5 we reviewed the mechanics of the international gold standard as it operated in the period 1873–1913. After considering an extensive literature on the subject, we considered the operation of the classical gold standard in terms of the behaviour of high-powered money across the various European countries and the United States. A gold standard operating by the classical rules would be expected to show closely matched high-powered money stocks. This result follows because gold and convertible currencies move to equate price levels internationally. While the levels of the high-powered money stocks were in fact highly correlated in this period, we generally were unable to establish an interconnection in the growth rates of high-powered money, and cointegration and Granger-causality tests also failed to indicate integration, even among the major economies that were supposedly supporting the system. In that discussion we did not conclude that the system was not working properly, but clearly something needs to be explained.