Chapter 9: Money in an Open Economy
Rabin 03 chap09 2/15/04 3:46 PM Page 242 9. Money in an open economy This chapter shows how monetary theory expounded without attention to the outside world can be adapted to an open economy. It stresses the role of money in balance-of-payments equilibrium, disequilibrium and adjustment. It contrasts the processes determining a country’s money supply under fixed and floating exchange rates. It illustrates the problems of compromise systems and reviews experience accumulated and theoretical contributions made since floating became widespread in 1971–73. Again the Wicksell Process plays a major role in the analysis. THE INTERNATIONAL GOLD STANDARD Under a gold standard, a country’s monetary authority keeps the national monetary unit and a definite quantity of gold equal in value on free markets. It stands ready to buy (or coin) unlimited amounts of gold at a definite price and also to sell unlimited amounts at the same or nearly the same price, as by redeeming its paper money. An international gold standard exists among all countries that tie their moneys to gold and allow its unrestricted import and export. The international gold standard, which ended in 1914, limited exchange rate fluctuations. Each government or monetary authority made its currency and gold freely interconvertible at a fixed price. The United States would coin gold into money and redeem money in gold at the rate of $20.671835 per fine troy ounce. The British pound sterling ‘contained’ 4.86656 times as much gold as the dollar. When the dollar price of sterling on...
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