Prosperity and Depression.pdf

o • ANature and CalISe.! of the CyclePart IIstability. So far we have assumed that each country offers toexchange gold at a constant rate against its own currency, and keepsa reserve ofgold which varies in some ratio with the volume ofthemonetary circulation. An alternative method of keeping theexchanges stable consists in buying and selling foreign exchangeat a fixed rate and in treating foreign means ofpayment and claimsthereto (balances abroad) as reserve instead of gold. These arethe famous " exchange standards "--:-" gold exchange standard "," sterling exchange standard ", " dollar exchange standard", etc.For convenience, we shall refer to the countries whose centralbanks hold their reserves in the form of assets expressed in themonetary unit of some other country or countries as " exchangestandardcountries ", and to the countries whose exchange providesthe standard for the first group as "reserve countries ".1 Agroup of countries in which some (the "exchange-standardcountries ") keep their reserves in the shape of the assets of theothers (the" reserve countries ") may be called a single" monetarygroup" of countries-e.g., the" sterling bloc". To maintain theunity of the monetary group, there must either be only a singlereserve country whose currency, itself independent, provides thesta~dard for the group or the reserve countries must have a commonstandard--e.g., gold. aFrom the point of view of the individual exchange-standardcountry which thus" pegs" its exchanges to some other currency)the external money mechanism is exactly the same as under thegold standard; and the limits and possibilities of action to obviateexpansionary or depressing influences from outside also remainin principle the same. If the policy is carried through by thecentral bank, with foreign exchange taking the place of gold asthe reserve against liabilities which constitutes the country's basic1 The term cc gold-exchange standard" is a little too narrow, becauseit suggests that the cc reserve countries" keep their reserve in gold orexchange their currency on demand into gold. This need not be thecase, as the example of the II sterling group" (CC sterling bloc tt) shows.two-sided orreciprocal exchange standard would be an arrangementwhereby each member of the group undertakes to treat claims on all theothers (foreign exchanges) as reserve. Under such a system, clearly thecountry which pursues the most inflationary policy would set the pace forall the others and would force them to inflate too. -