6 - International policy coordination in historical perspective: a view from the interwar years

Summary

Measures of currency reform will be facilitated if the practice of continuous cooperation among central banks of issue, or banks regulating credit policy in the several countries can be developed. Such cooperation of central banks, not necessarily confined to Europe, would provide opportunities of coordinating their policy, without hampering the freedom of the several banks.

(From Resolution 3 of the Report of the Financial Commission of the Genoa Conference, 1922.)

In the days of the gold standard, it is sometimes said, international policy coordination was a moot point. Popular accounts based more on caricature than on careful historical analysis portray the gold standard as a remarkably efficient mechanism for coordinating the actions of national authorities. Policies were so easily reconciled, it is argued, because those responsible for their formulation, regardless of nationality, shared a belief in balanced budgets and a common overriding objective: pegging the domestic currency price of gold. When central banks intervened in financial markets, it is suggested, they did so mechanically, obeying ‘rules of the game’ which dictated that they only reinforce the impact on domestic money and credit markets of balance of payments conditions. For example, a central bank losing reserves would raise its discount rate while the central bank gaining reserves would lower its discount rate, thereby reinforcing one another's efforts to restore external balance. Hence monetary policy under the gold standard is a favorite example of those who argue that international policy coordination is most readily achieved under a rules-based regime rather than one that depends on discretion.