The Gold Standard in Theory and History

By Barry Eichengreen; Marc Flandreau | Go to book overview

Introduction

One of the most durable questions in the literature on the gold standard is how the adjustment process maintained payments balance and currency stability. The most influential answer is the price-specie flow model of David Hume, described in Chapter 2. Hume's model highlights the role of relative prices in bringing imports and exports into equality. The model advanced by P.B. Whale shifts the focus to interest rates and international capital flows, minimizing the importance of gold flows, the factor emphasized by Hume. Donald McCloskey and J. Richard Zecher shift the focus again, this time to money supply and money demand, criticizing the Humeian view that adjustment relied on relative price movements and instead stressing changes in wealth and money balances. Much in the way that McCloskey and Zecher minimize the role of relative commodity prices, Trevor Dick and John Floyd minimize interest-rate differentials, arguing that capital flows responded quickly to international differences in interest rates, which in turn allowed the balance of payments to accommodate disturbances to the economy. Finally in Part I, Michael D. Bordo and Finn Kydland analyze the gold standard as a contingent rule, highlighting the authorities' ability to suspend gold convertibility in response to exceptional shocks without damaging their credibility.

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