Essays on Stability of the Classical Gold Standard: Money supply, international capital mobility and symmetry of business cycles

Abstract

The three essays of the thesis have the common topic of monetary integration and financial instability in Europe during the period of precious metal standard in the second half of the 19th century. The first essay discusses mainly European business cycles and their inter-country symmetry from 1865 to 1913. An indicator is developed to measure the symmetry in a way which depicts temporal changes in the development. The main result of the study is that symmetry of European business cycles increased considerably from the late 1870s, and was strongest in the heyday of the Classical Gold Standard, in the 1880s and 1890s. Nevertheless, there was a clear decrease in symmetry of business cycles in half of the country-pairs of the sample during the last decades before the First World War. The second essay studies the impact of international capital transfers on inter-country symmetry of business cycles in the second half of the 19th century. Money stocks in financially advanced European countries were found to be connected with both domestic investments and capital exports in those countries which could export capital. New money tended to be directed to foreign investments rather than domestic ones. As investments had a crucial impact on economic growth, international differences in growth of money supply, and differences in growth rates of investments and net capital exports determined international differences in cyclical growth rates. The third essay studies the possibility that money supply was determined endogenously in the advanced European economies in the late 19th century; the evolution of banking as a cause of that endogeneity, and the consequences of this development on capital flows between countries participating in the pre-First World War gold standard. It is found that money was supplied by the private banking sector independently of the gold stocks and independently of central banks’ monetary policy, rendering the financial system potentially unstable. It is also found that money supply in financially advanced countries was connected with indebtedness of peripheral countries.