Foreign Investment & Gold Standard in Globalization

Foreign Investment Mechanisms Before 1914

• The mechanism for foreign investment consisted of a host of institutional arrangements from one country to another: markets for foreign exchange, stock and bond markets, central banks, private banks, and brokers.
• Great Britain was the largest foreign investor before 1914. In 1914, British investment abroad amounted to 43% of the world total. Destinations: government bonds of several European countries, the United States, Latin American countries, and the British Empire.
• France was the second-largest foreign investor. Destinations: Spain, Portugal, Italy, Belgium; and Russia.

The Reaction to Globalization and the Return to Protectionism

The crisis, plus the interest of some groups (mainly agriculturists) of the developed nations, created a demand for protection.

Consequences of the Return to Protectionism

Although the rate of growth of international commerce slowed somewhat in the two decades after 1873, the rate was still positive, and it accelerated again in the two decades before World War I.

The Gold Standard

Throughout history, various commodities have served as monetary standards, but gold and silver have always been the most prominent. The function of a monetary standard is to define the unit of account of a monetary system.

• In the 18th century, England was technically on a bimetallic standard.
• Gold served as the ultimate base or reserve of the entire monetary supply of the country.
• Thus, the movement of gold into and out of the country caused fluctuations in the total money supply, which in turn caused fluctuations in the movement of prices.
• When the international gold flows were slight, or when inflows balanced with outflows, as they usually did, prices tended to be stable. But large inflows...

Why the Gold Standard Matters

The gold standard was part of the institutional framework supporting the large capital flows that we have discussed before. The gold standard was arguably important for the growth of trade in the first age of globalization.

What Exactly is a Gold Standard?

Formally, one can think of it as having three elements:

• Government, directly or through an agency (the central bank), pegs the domestic-currency price of gold.
• Gold imports and exports are left unrestricted.
• There is a rule linking the money supply to the gold supply.

History of the Gold Standard

For the first three-quarters of the 19th century, most countries were on either silver or bimetallic standards. But Britain, after the Napoleonic Wars, adhered to the gold standard. And the country had a central role in the international economy, and London was the financial capital of the world. Sterling, fully convertible into gold, was the world's hardest currency.

Spread of the Gold Standard

It paid to adopt the same monetary standard as countries with which you traded and from which you borrowed. Trade with Britain had become more important.