Floating against the Tide: Spanish Monetary Policy 1870–1931

Abstract

The gold standard began to emerge as a universal monetary system in the late 1870s, and it had spread throughout the world economy by 1900. It was unusual for nations to be off the gold standard, and it meant that they were detached from the international financial community. Spain never joined the gold standard club in any of its varieties, either before or after 1914. Unlike the vast majority of the European currencies, the peseta's exchange rate fluctuated, sometimes widely, against gold and gold currencies. Gold convertibility was suspended in 1883 and never resumed. Nevertheless, the monetary authorities were aware that the Spanish economy, off the gold standard, was an outlier in the international economy and made plans to put the peseta on gold both before and after 1914.Why Spain never adopted the gold standard is a complex issue, and our paper offers a possible answer by examining the behaviour of an issuing bank that refused to accept, or resisted, its role as a central bank. Our study also provides a basis for a comparison between the Bank of Spain, some of its features and policies, with other peripheral issuing institutions. Moreover, our paper encompasses both the pre-war and the post-war periods, which allows us to present both the similarities and the differences in the exchange and monetary policies of the Spanish authorities during the era of the classical gold standard and the years of the gold exchange standard. Keywords AbstractThe gold standard began to emerge as a universal monetary system in the late 1870s, and it had spread throughout the world economy by 1900. It was unusual for nations to be off the gold standard, and it meant that they were detached from the international financial community. Spain never joined the gold standard club in any of its varieties, either before or after 1914. Unlike the vast majority of the European currencies, the peseta's exchange rate fluctuated, sometimes widely, against gold and gold currencies. Gold convertibility was suspended in 1883 and never resumed. Nevertheless, the monetary authorities were aware that the Spanish economy, off the gold standard, was an outlier in the international economy and made plans to put the peseta on gold both before and after 1914.Why Spain never adopted the gold standard is a complex issue, and our paper offers a possible answer by examining the behaviour of an issuing bank that refused to accept, or resisted, its role as a central bank. Our study also provides a basis for a comparison between the Bank of Spain, some of its features and policies, with other peripheral issuing institutions. Moreover, our paper encompasses both the pre-war and the post-war periods, which allows us to present both the similarities and the differences in the exchange and monetary policies of the Spanish authorities during the era of the classical gold standard and the years of the gold exchange standard.

Capital Flow Bonanzas as a Fundamental Ingredient in Spain's Financial Crises, 1850-2015

“…Consequently, the Bank of Spain did not feel committed to exchange rate stability or the convertibility of banknotes into gold (Martín-Aceña et al . 2012). However, the Bank of Spain was strongly constrained by the Treasury and its financial needs 5 .…”

“…In Spain, although the central bank was not a state institution, the government granted the Bank the monopoly of issue in 1874 in exchange for a loan of 150 million pesetas , and advanced cash to the Treasury in exchange for government bonds that the Bank kept in its portfolio (Martín-Aceña et al . 2012). The Bank performed many functions on behalf of the state, such as being responsible for the collection of direct and property taxes or servicing the public debt.…”

Did the non-adoption of the gold standard benefit or harm Spanish economy? A counterfactual analysis between 1870-1913

“…Even in the Dictamen there are echoes of these positions (Serrano, 2004, p. 61). Moreover, Martín-Aceña et al (2011) consider that neither the Treasury nor the Banco de España were prepared to take the necessary measures to choose the appropriate parity, balance the budget or follow an orthodox fiscal policy to maintain the value of the exchange rate. For many, it was the situation of the treasury that did not allow the gold standard to be implemented, since it required limiting the budget and indebtedness (Tortella, 1994).…”

“…The results are not only sensitive to the economy, but also to the very fate of society, so that we are facing an objectively 'greater issue'". Martín-Aceña et al (2011) underline that "Spain's historic detachment from the world monetary system cost the country dearly in terms of both its debt burden and GDP growth, two questions that warrant further research". This paper focuses on the second question.…”

The long-run effects of pandemics on inflation: Will this time be different?

“…Hence, we have to work with data from the 19th century onward, which covers only 11 major pandemics and which may partly explain the differences in the responses of trend inflation. Furthermore, Spain is the only country in our sample that never adopted the gold standard, causing the peseta’s exchange rate to fluctuate, sometimes strongly, against other gold currencies ( Martín-Aceña et al, 2012 ).…”