ABSTRACT
For the entire period that it was in effect, adherence to the gold standard in Southern and Eastern Europe as well as Latin America was paradoxical. While the standard was definitively established in Germany, the Netherlands, and Scandinavia in the early 1870s and long before in France and the United Kingdom, Austria-Hungary, Greece, Italy, Portugal and Spain in Europe, and Argentina and Chile in Latin America went in and out of it. Although chronic fiscal imprudence caused the suspension of convertibility in Argentina, Greece and Italy, this does not appear to be the case of Chile, Portugal and Spain. Ruling out chronic fiscal imbalances, it is difficult to explain long spells of inconvertibility in a world under the gold standard. This chapter studies the two sources of difficulties faced by peripheral countries, taking the Iberian ones as examples, that made their adherence to the gold standard trying. The first source is variability of the terms of trade and the second, the degree of flexibility of the price of nontraded goods. One of the results from the dependent economy model is that the higher the variability of the terms of trade and the more rigid domestic prices, the harder it is to remain within a fixed exchange rate regime.
