Lawrence Broz 205of gold losses or frequent variations in interest rates, the central banks developed
other techniques for dealing with gold drains. Although no country perfectly
subordinated considerations of internal balance to external balance, England came
the closest to this principle.
Yet in spite of such national differences, the international gold standard
functioned smoothly for several decades. This paradox is explained by the positive
systemic externalities that the major countries’ policies produced. On the one
hand, England’s stronger commitment to gold-standard orthodoxy gave the world
a medium of exchange and a store of value of unquestioned credibility. No
other currency could match sterling’s supremacy as a medium for reserves and
transactions, so long as gold convertibility and free gold movements were
conditional elsewhere. As a result the world was provided with a currency
eminently suitable for international transaction and reserve purposes—one of
the necessary system-sustaining functions identified by Kindleberger. On the
other hand, France (and to a lesser extent Germany) came to provide the system
with lender-of-last-resort facilities for balance-of-payments financing by reason
of the dominant sociopolitical interest the French had in limiting the extent to
which external economic forces restricted domestic macroeconomic flexibility.
In order to maintain domestic macroeconomic flexibility, France built up a very
large gold reserve and made it a point of policy to lend abroad from this fund to
stem speculative pressures against the franc. The goal was to prevent large and
sudden movements of reserves and gold from undermining domestic
macroeconomic goals. Together, the nationally based and self-interested policies
of Great Britain and France meshed compatibly to provide the public goods...the
international monetary system needed for smooth operation. England alone did
not manage the gold standard. Instead, management was a collective endeavor
that derived from differences in national preferences. These differences in turn
were rooted in the domestic political economies of the major states.
DOMESTIC SOURCES OF ENGLAND’S GOLD STANDARD POLICIES
It was during the first decades of the nineteenth century that a powerful circle
of societal interests—land, the City’s merchant banks and acceptance houses,
and creditors of the government—congealed in England around the
internationalist and deflationary monetary framework of the gold standard.
The coalition demonstrated its political power by institutionalizing the gold
standard first in Peel’s Act of 1819 and then more strongly in the Bank Charter
Act of 1844. In the second half of the century, the financial sector reaped the
international advantages of the country’s domestic monetary arrangements.
On the strength of the commitment to gold, London flourished as a worldwide
financial center, and sterling became the premier international currency. This
commitment ensured sterling’s place in the international financial system and
thereby generated rents for the banking sector; it also brought to the international
system a medium of reserve and payment of unquestioned reliability—a systemic
public good.