Inter-Dependence and Instability in the Classical Gold-Standard Era

Abstract

Abstract Did the classical gold-standard era witness economic stability? Financial flows benefitted from the stability of exchange rates under the classical gold standard. The leading countries successfully managed the gold standard. These economies possessed credibility and cooperation which enabled the smooth functioning of the gold standard. The gold standard often imposed tough policy choices on countries, and was typically more dysfunctional in the so-called periphery. In many cases, these countries were unable to maintain their commitments to the gold standard. They could not credibly commit to taking the actions required by trade and financial imbalances. In these cases, capital flows, the gold standard, and weak institutions combined to heighten the chance of a financial crisis of which there were many prior to 1914.