Summertime Blues

FLORENCE – Summer is a time for beaches and relaxation – and, historically, for all sorts of destructive crises. Time and again, it has proven dangerous for the world to be on holiday.

August is an especially bad month for financial markets. On August 15, 1971, President Richard M. Nixon ended the commitment of the United States to a fixed gold price, and since then the world has lived with currency volatility and instability. On August 13, 1982 (a Friday), Mexican Finance Minister Silva Herzog went to Washington to tell the International Monetary Fund and the US government that Mexico would be unable to make its scheduled debt payment the following Monday. On August 17, 1998, Russian Prime Minister Sergei Kiriyenko announced that his country would simultaneously default and devalue. And in the first week of August 2007, IKB Deutsche Industriebank disintegrated, as the US subprime crisis spread.

The roots of this seasonal periodicity of crises predate World War I, in the era of the classic gold standard. The explanation at that time was usually found in the predictable timing of the international payments mechanism. In the late summer, farmers in the Western Hemisphere brought their crops to traders for export, and demanded cash payment, which the traders needed to raise from their banks. The consequence was a demand for gold in the US and mounting exchange-rate pressure on Britain and other European importers.

The same pattern of selling pressure on the pound sterling was repeated in the interwar era. Finally, in September 1931, Britain departed from the restored gold standard, which led to the collapse of the system as a whole.