Searching for historical analogies in political economy: the Baltic states and the gold standard regime

ABSTRACT

This article compares the contemporary politico-economic regime in the Baltic countries with the classical gold standard regime, which successfully functioned in the Western world from 1870 until 1914. Both the classical gold standard system and the Baltic political economies were based on a hard currency peg policy supported by a high degree of economic flexibility. Politically, this flexibility was ensured by a strong insulation of economic policy-making due to a weak political left. Furthermore, the classical gold standard system and the Baltic regimes shared an ideational consensus supporting economic liberalism in general and hard currency peg policy in particular.

KEYWORDS:

• Gold standard
• economic adjustment
• flexibility
• historical analogy
• internal devaluation

Acknowledgements

The author would like to thank Ringailė Kuokštytė, Magnus Feldmann, and Zenonas Norkus as well as two anonymous referees for helpful comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Although Latvia de jure did not have a currency board, it de facto operated as one, or at least very similarly to one. See, for instance, Feldmann (2008, 245).

2. In theory, adjustment of imbalances between the surplus and deficit countries could be symmetric, whereby ‘under “the rules of the game,” central banks of countries experiencing gold inflows were supposed to assist the price-specie flow mechanism by expanding domestic money supplies and inflating, while deficit countries were supposed to reduce money supplies and deflate’ (Bernanke and James 1991, 36–37). However, in practice ‘no sanction prevented surplus countries from sterilizing gold inflows and accumulating reserves indefinitely, if domestic objectives made that desirable. Thus, there was a potential deflationary bias in the gold standard’s operation’ (Bernanke and James 1991, 36–37). Indeed, lately one can observe a similar situation within the Eurozone where calls have been made upon the surplus countries (primarily Germany) to contribute to the correction of imbalances in the Single currency block by stimulating domestic aggregate demand, but in practice the bulk of adjustment costs and pressure has been placed on the deficit countries in the South.

3. It must be said that the IMF ultimately supported the anti-crisis policy chosen by Latvian authorities and that Blanchard himself subsequently admitted that the results of this policy were better than he had expected (Blanchard 2012).

Additional information

Funding

The author’s postdoctoral fellowship is being funded by European Union Structural Funds project “Postdoctoral Fellowship Implementation in Lithuania” within the framework of the Measure for Enhancing Mobility of Scholars and Other Researchers and the Promotion of Student Research [VP1-3.1-ŠMM-01] of the Program of Human Resources Development Action Plan.

Notes on contributors

Vytautas Kuokštis

Vytautas Kuokštis is a postdoctoral fellow of Vilnius University’s Faculty of Philosophy in the Department of Sociology. He is also a lecturer at Vilnius University’s Institute of International Relations and Political Science. His academic interests focus on the international and comparative political economy. His most recent publication is Cooperating Estonians and ‘Exiting’ Lithuanians: Trust in Times of Crisis (in Post-Soviet Affairs). Personal website: http://vu-lt.academia.edu/VytautasKuokstis.