Richard Grossman has an interesting op-ed piece in the Los Angeles Times on why the US should not return to the gold standard - click here. The Free Exchange blog at the Economist also has a post on the gold standard. I have recently been examining the financial crises which occurred in the UK in 1837, 1857, 1857 and 1866 for my new book. On each occasion, whenever one of these financial crises occurred, the Bank of England had to increase its interest rate (known as the bank rate), sometimes as high as 10%. Why did they do this in the middle of a crisis? Shouldn't interest rates be cut in a crisis? The answer is simple: the gold standard meant that the Bank had to increase its interest rate to prevent gold draining from it and the country.
As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of