ABSTRACT
This chapter presents a review of the literature concerning seasonal fluctuations in interest rates and exchange rates in the United States and Britain during the pre-World War I period. Both contemporary accounts and more recent studies of seasonal behavior are discussed here. There is clear evidence of strong seasonality of short term interest rates and exchange rates before World War I and of a weakening of seasonal patterns after World War I. The change in the seasonal behavior of short term interest rates has received more attention in recent years than the seasonal behavior of exchange rates because of a debate concerning the role played by the Federal Reserve in eliminating seasonality of short term interest rates in the United States after its establishment in 1914. Several key observations can be drawn from this literature review. First, the findings of strong short term interest rate seasonality before 1914 and its disappearance after 1914 are consistent across studies and do not appear to be sensitive to the choice of interest rate or method of statistical analysis. Second, several studies have found exchange rate seasonality during the period 1880-1914, but there are indications that the pattern of seasonal
fluctuations was not stable over the time period. Seasonal fluctuations appear to have diminished in amplitude, but not to have disappeared completely by the outbreak of World War I. Third, most recent work concerning the behavior of exchange rates during the gold standard is concerned with the issue of the efficiency of the gold standard. One approach in this literature focuses on the determination of the gold points and whether or not exchange rates moved outside the gold points. In a more recent work, Officer (1989) develops a model of gold standard efficiency in which the actual loss due to deviations of the dollar-sterling exchange rate from its theoretical asset market equilibrium level is compared with the expected loss under "neutral speculation." Neutral speculation refers to the case where speculators expect that every level of exchange rates within the gold points has an equal probability of occurring. Officer characterizes foreign exchange market efficiency during the gold standard as "remarkable." While this efficiency literature is concerned with the behavior of exchange rates during the gold standard, it ignores seasonal fluctuations of exchange rates and does not explore the issue of whether or not predictable profit opportunities existed because of predictable seasonal fluctuations of exchange rates.
