Donald N. McCloskey and J. Richard Zecher†
Each intellectual generation since the mercantilists has revised or refined the understanding of how the balance of payments is kept in equilibrium under a system of fixed exchange rates, and all these understandings find a place in the historical literature on the gold standard of the late nineteenth century. It is difficult, therefore, to locate the orthodox view on how the gold standard worked, for it is many views. If one can find historical and economic writings describing the gold standard (and other systems of fixed exchange rates) in the manner of Hume, as a price-specie-flow mechanism, involving changes in the level of prices, one can also find writings describing it in the manner of Marshall, involving changes in the interest rate, or of Taussig, involving changes in the relative price of exportables and
* An earlier and longer version of this essay (available on request) was presented to the Workshop in Economic History at the University of Chicago and to the Cliometrics Conference at the University of Wisconsin. We wish to thank the participants in these meetings for their comments. The friendly scepticism of Moses Abramovitz, C.K. Harley, Hugh Rockoff, Jeffrey Willliamson and our colleagues at the University of Chicago, among them Stanley Fischer, Robert J. Gordon, A.C. Harberger, Harry G. Johnson, Arthur Laffer and H. Gregg Lewis, contributed to a sharpening of the argument.
†From Jacob A. Frenkel and Harry G. Johnson (eds.), The Monetary Approach to the Balance of Payments, London, Allen & Unwin, 1976, pp. 184-6, 192-208, abridged.