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A Monetary History of Europe | Aulia LukitasariLiterature Review
Week 1
The monetary arrangements established by international negotiation are the exception. Its development
was one of the great monetary accidents of modern times. With Britain’s industrial revolution and its
emergence in the nineteenth century as the world’s leading financial and commercial power, Britain’s
monetary practices became an increasingly logical and attractive alternative to silver-based money for
countries seeking to trade with and borrow from the British Isles. Silver was the dominant money
throughout medieval times and into the modern era. Although gold coins had been used by the Romans,
but silver continued to dominate everyday use. Only in the eighteenth and nineteenth centuries did this
change. The residents of a country purchased abroad more than they sold, or lent more than they
borrowed, they settled the difference with money acceptable to their creditors. Money in circulation
rose in the surplus country and fell in the deficit country, working to eliminate the deficit. After 1870,
the gold standard emerged as a basis for international monetary affairs and only then did countries settle
on gold as the basis for their money supplies. Only then were pegged exchange rates based on the gold
standard firmly established.
Industrialization rendered the one country already on gold, Great Britain, the world’s leading economic
power and the main source of foreign finance. This encouraged other countries seeking to trade with
and import capital from Britain to follow its example. The network externalities that had once held
bimetallism in place pulled countries toward gold. A chain reaction, unleashed by the incentive for each
country to adopt the monetary standard shared by its commercial and financial neighbours, was under
way. The transformation was swift, as the model of network externalities would predict. Other countries
followed.
The most influential formalization of the gold-standard mechanism is the price specie flow model of
David Hume. Hume considered a world in which only gold coin circulated, and the role of banks was
negligible. Each time merchandise was exported, the exporter received payment in gold, and each time
an importer purchased merchandise abroad, he made payment by exporting gold. It experienced a gold
outflow, which set in motion a self-correcting chain of events. But as time passed and financial markets
and institutions continued to develop, Hume’s model came to be an increasingly partial characterization
of how the gold standard worked. The other feature was the absence of international gold shipments on
the scale predicted by the model. Leaving aside flows of newly mined gold from South Africa and
elsewhere to the London gold market, these were but a fraction of countries’ trade deficits and surpluses.
Consider a world in which paper rather than gold coin circulated or, as in Britain, paper circulated
alongside gold. The central bank stood ready to convert currency into gold.
, A Monetary History of Europe | Aulia Lukitasari
Week 2
Chapter 16. War Finance, Reparations, War Debts
During the WW1, the gold standard is suspended except in the US. After the war, the elites wanted to
go back to gold standard. However, to return to gold standard would be troublesome and complicated
because of the war and financial difficulties. Thus, the gold standard changed into the gold exchange
standard. The WW1 was nasty war with new weapons and very expensive. It was more expensive than
they thought, and they had to finance the war.
There were three ways to finance for war, which are through taxes, borrowing, or monetary finance. All
three were used by countries going to war. Borrowing money was the most popular way to finance the
war as you can pay back the debt in the future. High taxation would erode the support of the war and
that was the worry of politicians. By borrowing, they were able to conceal the cost of the war. They
started borrowing from the population by buying government bonds and turning their silver into gold.
But as the war continued, the savings of the people were depleted in part because of inflation so the
government could nott borrow from the population and decided to borrow abroad. Monetary finance
was not possible, because to print money, the government was relied on digging the gold. A few days
before the war broke out, they suspended the convertibility of currency into gold, and resulted in a bank
run of gold. The central banks closed down. Thus, the gold standard came to an end when the war
started and only the US stayed on the gold standard. As banknotes were being printed way more,
inflation happened. Prices doubled and tripled for countries as a consequence of money printing and
borrowing.
In 1919, Treaty of Versaille was a conference for establishing a treaty for after the war. Germany,
Soviets were not invited. The german thought that they could negotiate over the treaty but they had
nothing to negotiate, they just had to sign and accept the terms of the treaty as they had to pay 132
billion gold marks plus 26 percent in export taxes over forty-two years. High payments for Germany
also meant that they were a smaller threat as an economic superpower. John Maynard Keynes who
worked in the Treasury during ww1 and Economic advisor to British government at Versailles, opposed
war reparations for Germany. As he found himself intensely disliking the reparations settlement. He
resigned from the British delegation and returned to England.
Keynes wrote ‘The Economic Consequences of the Peace’ (1919). In the book, Keynes asserted that
there were three sources of instability in Europe: its population dependent for its livelihood on a
complex and somewhat artificial system of organization; the psychology of capitalist and labouring
classes, and the tenuous character of Europe's claim on overseas food and raw materials. France did not
like the book as they felt like they were entitled to the fruits of the war. There was an international
financial obligation after the WW1 and there was a mutual independent system for loans of the war.
The US was the winner because they were receiving money and Germany was paying.
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