Discount rate policy did not have the same scope in all countries and did not always follow the so-called “rules of the game.” Here too, the United Kingdom enjoyed a clear advantage linked to the structure of London’s international market. In 1913, Keynes explained in his work on Indian currency that British monetary policy was far more effective than that of any other country. An increase in the Bank of England’s discount rate, following a loss of gold, tended to restore external balance rapidly without having to wait for the adjustment effects through prices and costs envisaged by classical theory. On the one hand, higher money prices led foreigners to reduce their demand for loans; on the other, discount houses had to curb their operations to avoid liquidity shortages. For Great Britain, the issue was much more about lending less abroad than about borrowing foreign capital. In times of difficulty, it is easier to lend less than to borrow more; therefore, an increase in interest rates could not have as rapid or as deep an effect in net debtor countries as in creditor countries. Even then, those debtor countries needed a sufficiently developed banking system for monetary policy to be feasible.
Great Britain could not only remedy its own imbalances very quickly, but this privileged and asymmetric mechanism also operated to the detriment of peripheral countries producing primary commodities. An increase in interest rates in London, by reducing economic activity and potentially causing price declines, could prompt holders of raw materials and agricultural products to liquidate part of their stocks. It is well known that prices of primary products fluctuate more rapidly and with greater dispersion than prices of manufactured goods. A restrictive monetary policy decided by the Bank of England thus led to an improvement in Britain’s real terms of trade by reducing import prices much more than export prices. Less developed countries—financially indebted and dependent on primary production—bore the consequences of the external rebalancing policy of the economically dominant country.
As their real terms of trade deteriorated, these countries could move from balance to an external deficit, or see that deficit widen at a moment when obtaining new British capital was becoming increasingly difficult. The so-called “automatic” rebalancing attributed to the gold standard worked mainly for industrialized countries and those best equipped with financial and banking infrastructure. Finally, it should be recalled that the main industrial countries generally did not follow the “rules of the game.” In his study Monetary Policy under the Gold Standard (1880–1914), Arthur Bloomfield reached the same conclusions as Nurkse, who examined the period 1922–1938: during the last two decades of the nineteenth century and throughout the interwar period, the “rules of the game” were not observed. Had they been observed, central banks’ international liquidity reserves—gold, silver, and foreign exchange—should have moved in the same direction as their domestic assets (discounted bills, loans, securities).
It has also been shown that between 1844 and 1900 the Bank of England changed its discount rate 400 times, while the Bank of France did so only 111 times and the Reichsbank 116 times. Other means were therefore required to avoid intervention, and the importance of the Bank of France’s gold reserves has often been emphasized. The Cunliffe Report thus elevated, in principle, what had previously been an exception. The authors of this report, like some classical economists, made the mistake of granting universal validity to mechanisms that had ultimately been applied only within the dominant economy of the nineteenth century. Traditional theory consistently neglected the crucial role of capital movements in balance-of-payments adjustment mechanisms. The financing of foreign trade through London institutions certainly prevented the too-rapid implementation of measures aimed at correcting imbalances that the mere use of gold, in the absence of any international credit system, would inevitably have triggered. Acceptance and discount operations carried out in London represented a mass of short-term credit that, in the presence of non-persistent deficits, avoided the immediate need for gold transfers. The flexibility of the gold standard’s operation was due, in part, to the City of London’s capacity to create short-term credit.