Golden Straightjacket or Golden Opportunity? Sovereign Borrowing in the 19th and Early 20th Centuries.

What incentives did the classical gold standard provide for its maintenance? How did the benefits of the gold standard help it to be come a central piece of macroeconomic policy in the pre-World War I era? While the gold standard provided a variety of benefits to governments and societies, such as monetary restraint and the facilitation of trade flows, this paper focuses on the impact of the gold standard on sovereign borrowing. I argue that the classical gold standard regime served as both a constraint and an opportunity for governments, in a way similar to present-day currency boards, or to Economic and Monetary Union. Because it required automatic adjustment in response to balance of payments imbalances, as well as the free flow of capital and goods, the gold standard privileged external commitments (the maintenance of par values) over nations? internal conditions. Governments? monetary policy autonomy was surrendered in service to the gold standard regime. At the same time, however, commitment to the gold standard allowed governments to access international capital markets at lower rates of interest; gold convertibility appeared to signal sound government finances, as well as future debt servicing capacity. [ABSTRACT FROM AUTHOR]