The International Lender of Last Resort

Robert Z. Aliber and Charles P. Kindleberger
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Robert Z. Aliber: University of Chicago
Charles P. Kindleberger: Massachusetts Institute of Technology

Chapter 13 in Manias, Panics, and Crashes, 2015, pp 279-312 from Palgrave Macmillan

Abstract: Abstract The primary argument for an international lender of last resort is to reduce the likelihood that a country would transmit a deflationary shock to its trading partners, because the price of its currency would decline in response to a temporary surge in import payments or a shortfall in export earnings. This decline would transmit deflationary pressure to its trading partners, both when the price of its parity was reduced and when the price of its currency was allowed to decline. The cliché from the 1930s was that some countries followed a ‘beggar-thy-neighbor’ policy; they sought to increase manufacturing employment either by allowing market forces to lead to a decline in the price of their currency, or by establishing new and lower parities for their currencies. When the price of the Austrian schilling was allowed to decline in May 1931, deflationary pressure was transmitted to Germany; subsequently deflationary pressure was transmitted to Britain. When the price of the British pound declined after Britain went off gold in September 1931, the deflationary pressure was transmitted to the United States, France, Italy, and to the other countries that maintained parities for their currencies in terms of gold. When the link between the US dollar and gold was severed in March 1933, the deflationary pressure was transmitted to France and other countries that retained their gold parities.

Date: 2015
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DOI: 10.1007/978-1-137-52574-1_14

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