The Classical Gold Standard’s Adjustment to Shocks: American Railroads and British Investment in the 1880s

From a late twentieth-century perspective, the international gold standard in its nineteenth-century heyday appears impressively stable and flexible. Some observers have argued that the gold standard outperformed the actively managed monetary arrangements of more recent decades. But since our understanding of the details of the workings of the historic gold standard remains seriously incomplete, such statements remain speculative. This chapter examines a major shock to the gold standard — the large flow of British capital attracted by the massive surge in American railroad investment in the 1880s. The episode dealt an unanticipated shock to the international monetary equilibrium. Adjustment to the shock provides a chance to examine details of various economies’ responses under the gold standard. Unfortunately the detailed history of the decade provides little support to any of several hypotheses regarding gold standard adjustment mechanisms. Largely crisis-free adjustment appears to owe more to coincidence of the timing of British domestic investment than to any mechanism that adjusted the British economy to the massive upsurge of foreign lending.