The madness of fixed exchange rates: The spectre of intervention

Monetary historians cite "unusually favourable political circumstances" to explain the emergence of the classical gold standard. Its demise, four decades later, was the direct result of unusually unfavourable political circumstances , the outbreak of World War 1. Was there any connection between the monetary regime and the slide to war? What lessons are there for today's world of restored global capitalism, a world in many ways reminiscent of the late 19th century? The most striking is that the maintenance of a world cap- italist order is incompatible with fixed exchange rates.

The classical gold standard worked relatively well for many of the "emerging markets" of the day, at least for those marked by political stability and English-based legal systems (the British Dominions...