The Case for the Peripheries

Abstract

In a world that is presently experiencing increased volatility and pressure on exchange rates, and when one of the most ambitious fixed exchange rate projects in history — the European Monetary Union — is on the brink of destruction, the classical gold standard again rises as a spectacular event in global monetary history. How, despite all the difficulties inherent in fixed exchange rate regimes, could this system remain for such a long time only to be interrupted by the outbreak of World War I? Even more intriguing is the question of how all the small, peripheral and capital-importing economies successfully managed to remain on the gold standard — especially as these economies were the first to experience deflationary pressure in times of international capital shortage. Consider: adherence to the gold standard was up to each economy and it was thus always possible for economies suffering from the negative effects of the fixed exchange rate to opt out. Yet, in Western Europe this only occurred on one occasion; when Portugal, the second country to adopt the gold standard in 1854, left the gold standard as a result of the Baring crisis in 1890.