We Are Not Alone
What happens in one nation can affect economic activity
in other nations. One can sometimes forget this in a nation
that is as large and self-sufficient in many items as the
United States. To help you remember that the rest of the
world matters, this site has woven discussion of
international issues into many topics.
The ways in which economic disturbances can be
transmitted to other countries, and whether they can be
transmitted at all, depend on the way a nation sets up its
international monetary arrangements. If it lets its exchange
rate float, its monetary policy is enhanced and its fiscal
policy is weakened relative to what happens with fixed
exchange rates (without exchange rate controls).
German hyperinflation did not spill over into France or
England and the residents of these countries were little
affected by what was happening in Germany. Germany had a
floating exchange rate, so as its domestic prices went up,
the value of its currency in terms of the French franc and
the British pound fell. This fall offset for the French and
the British the price rise inside Germany. The British buyer
of German wine saw little or no change in the price he had
to pay.
In contrast, the United States was on the gold standard
until 1933. As its price level dropped, its goods became
cheaper relative to goods in foreign nations that were also
on the gold standard. Since the price of the dollar could
not rise, this deflation set into effect flows of gold
across boundaries, and the logic of the system forced a
deflation throughout the nations that were also on the gold
standard. All countries that had fixed the value of their
currencies in terms of gold experienced the depression at
roughly the same time. For those not on gold, the effects
were less severe and in some cases very minor. For countries
that had fixed the value of their currencies in terms of
silver, the depression began when the United States began to
buy silver at a price above the market price, leading to an
outflow of silver from these countries and a reduction of
their price levels.
Copyright
Robert Schenk
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