This paper will analyse the monetary contradistinctions of the fixed exchange rate regimes of the classical gold standard (1870s - 1914) and the Economic and Monetary Union of the European Union. In relation to each other country within the currency union, the EMU is to a degree homologous to the classical gold standard. I see not the similarity in the nature of the unit of account (as the euro is fiat, as opposed to gold), but in the notionally rigid intra-currency zone nominal exchange rates between each country, fixed at unity in the case of the euro. Although seemingly counterintuitive in light of the metallist/fiat distinction, the relative flexibility of the gold standard vis-á-vis the euro and its consequences will be discussed below in light of historical and theoretical evidence. Crucial to the below analysis are two strands of thought, not immediately concomitant, the price-specie flow mechanism and the relationship between money, credit, asset prices and investment.
If under the gold standard, due to some exogenous stressor, the macroeconomic imbalances in the short run become too great, as was the case with the Great War and the economic difficulties of the following period, a nation may simply temporarily abandon the gold standard; whether by suspending convertibility of notes to specie, changing the value of the banknote relative to gold, or issuing an interdict on cross-border capital movement. Contrast this to the EMU where hypothetically an exit by any single country would result in an existential crisis for the eurozone; stoked by fears of exit, assets in ‘weaker’ nations would be exchanged in an inelastic fashion for assets in ‘stronger’ nations, ‘weak’ nation bond yields rise, the value of ‘stronger’ nations’ currencies appreciate to the point where exports become uncompetitive and a continent wide recession ensues. It may therefore be said that there is an inherent optionality in the practical workings of a gold standard regime; although if the aforementioned exogenous stressors are of an order of magnitude too great, it may be unwise to rejoin the system at the previous levels of exchange.
A recent econometric study (Morys, 2010) of monetary policy under the classical gold standard has disputed the notion of strict adherence to the “rules of the game”, which were rather more nuanced and accommodated the needs of core and periphery countries. In it, the author finds that individual nations maintained a significant degree of monetary policy flexibility. In this respect the system was more akin to EMU’s immediate predecessor the European Exchange Rate Mechanism. Additionally, as peripheral countries’ discount rate tool operated in a more erratic fashion (due to the highly volatile nature of capital flows into peripheral nations) than those of core countries, peripheral countries used two measures to adjust the gold standard to their needs:
“First, they did, for the most part, not introduce...