BANK RATE POLICY UNDER THE INTERWAR GOLD STANDARD: A DYNAMIC PROBIT MODEL*
The classical gold standard occupies an almost mystical position in the literature of international finance. In popular accounts the gold standard is portrayed as a remarkably durable and efficient mechanism for achieving price and exchange rate stability and for relieving balance of payments pressures. The system's resilience is attributed to the willingness of nationa) monetary authorities to refrain from impeding the international adjustment process. When central banks intervened in financial markets, it is said, they did so mechanically, obeying 'rules of the game' which dictated that they reinforce the impact on domestic money and credit of changing balance of payments conditions. Succeeding generations of economists and historians have sought to qualify this popular view. The recent contributions of Bordo (I98I) and Cooper (i982) make a critical assessment of extravagant claims concerning price and exchange rate stability under the classical gold standard. Other authors have extended the research of Bloomfield (I 959), Ford (I962) and Triffin (I964), who emphasised the special conditions that permitted the classical gold standard's smooth operation and cast doubt on the tendency of national monetary authorities to adhere faithfully to 'rules of the game." All too often, scant mention is made of the interwar gold standard, for it is not evident how interwar experience fits into either view. Certain facts are clear. It is clear that the interwar standard was far from durable; Britain's resumption of gold payments in I925 usually is taken to mark the gold standard's resurrection, just as her devaluation a mere 6 years later is taken as its demise. In the interim many of the major participants suffered serious balance of payments pressures that threatened to render their exchange rates indefensible. The system was anything but conducive to stability; it precluded neither price nor income fluctuations, as the Great Depression dramatically illustrated. Numerous explanations have been advanced for the interwar gold standard's