International Monetary Cooperation

By George N. Halm | Go to book overview

II. THE GOLD STANDARD MECHANISM

HOW THE GOLD STANDARD MECHANISM WORKS

IT IS BEST to begin a discussion of the International Monetary Fund proposals with a recapitulation of the gold standard mechanism. First, because the gold standard mechanism was the world's nearest approach to a system of international monetary equilibrium; second, because a return to the old gold standard game is asked for by conservative writers; third, because a modernized gold standard plan may compete for adoption; fourth, because the new plans contain essential features of the old gold mechanism; and fifth, because part of the design of the new plans is to be understood as an attempt to eliminate basic deficiencies of the old price-specie flow mechanism.

The gold standard game presupposes that the "member countries" are "on gold." Their monetary authorities are willing to buy and to sell gold at a fixed price in unlimited amounts. The national monetary units are defined in terms of weight units of gold, and through the medium of gold the exchange rates are fixed. Under these conditions gold is the world's common unit of value, an international means of payment, and a money reserve of international liquidity.

The gold standard mechanism works supposedly as follows: Assume that a country's purchases of commodities, services, and securities from other countries are not exactly offset by similar but opposite transactions. This country's increased demand for foreign currencies raises the price of these currencies in terms of the country's monetary unit. The immediate effect will be the same on which a system of free or flexible exchanges would

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