In Discussion Paper No. 1390 Research Associate Tamim Bayoumi and Michael Bordo focus on two cases in which major countries returned to a fixed gold standard at previous parities: the resumption of specie convertibility by the US in 1879, and of gold convertibility by the UK in 1925. These historical perspectives, they argue, may be of value in understanding issues involved when joining a fixed exchange rate regime – particularly in the context of EMU and ERM. Bayoumi and Bordo compare the two experiences in order to examine the degree to which their success or failure reflects the exchange rate strategies themselves or the external environment in which the parity resumptions occurred. A common set of macroeconomic fundamentals is examined so as to identify the important similarities and differences in underlying behaviour.

The authors find striking parallels in the behaviour of many of the fundamentals around the time of resumption. The main difference, however, lies in real economic activity. In the US, output grew significantly before, during and after resumption. In the UK, by contrast, there was a large decline in real output and a rise in unemployment in the early 1920s, followed by a recovery until 1925. Upon resumption, a temporary relapse in output and unemployment occurred, which was reversed in 1927. The paper's main conclusion is that the monetary and exchange rate policies pursued were not the dominant factors in explaining the economic problems of the UK. Instead, the very different external environments the two countries faced appear to have been critical to the respective success and failure of their strategy.

Getting Pegged: Comparing the 1879 and 1925 Gold Resumptions
Tamim Bayoumi and Michael D Bordo