Identifies 6 major themes
1. Gold was an ideal monetary standard because it was a standard of value and a medium of
exchange.
2. Essence of gold standard was the maintenance of a fixed mint price of national money in
terms of gold. Ensured uniformity of price of gold across nations through process of
arbitrage in gold, each country's price level determined by stock of gold which was
determined by country's real income and money holding habits. Golds flows through
changes in regional money supply would change and set the price to equilibrium. Example:
gold found in nation, price level rises, gold cheaper, gold flows out, stabilizes domestic
prices. This is through balance of trade deficit as domestic prices rise, imports become
more competitive, money flows to foreign nations. This is how the price-specie flow
mechanism kept national prices in line and balance of payments equilibrium.
3. Law of one price: stresses arbitrage in all traded commodities in that this in prices of
commodities across a common currency would influence the prices of similar goods. How
do we reconcile this with arbitrage in gold? Classical economists say gold is more effective
because of special properties. With transaction costs and information costs gold was in 18th
and early 19th best for arbitrage, later 19th with communications tech and development of
international securities and commodity markets, these become more feasible and gold
flows were needed less in adjustment mechanism.
4. Role of capital flows in gold standard adjustment of payments mech. Original idea with
PSFM adjustment was operated through flows of goods and money. later in 19th more
attention to short term capital flows as part of equilibrium mech. As 19th went on capital
flow understood as dominant part of mech.
5. Role of CBs, focus on bank of England, in adjustment mech. Bank's disregard of
domestic money market conditions, as private profit maximizing, maintain as low gold
reserves as possible while protecting itself with bank-rate weapon from golds outflows.
Bagehot criticized, Bagehot's rule of CB management. Gold standard came to be
understood as managed by CBs use of changes in the discount rate to facilitate adjustment
to internal and external gold drains. Discussion of CBs following of rules of the game, that
is, used their adjustment tools to speed up adjustment to external shocks, according to rules
CB of country with gold outflows should work to contract domestic money supply.
6. Proposals for reform to the gold standard.
Schools of thought:
The classical economists:
-Cantillon: writing in 1755, considered money in a quantitative structure, entirely gold and silver
coins. Value determined by market forces: tastes in jewelry etc. and scarcity. In short run
nation’s two key sources of money supply are its balance of payments surplus and domestic
gold/silver production. Identified domestic production from mines would cause inflation, make
imports cheaper and drive balance of trade deficit. This causes domestic outflow and stabilizes:
specie-flow mechanism. Direct expenditure effect: excess supply of money leads to spending
more than income, some directed to foreign goods, money outflow. One-price-law: commodity
arbitrage will ensure same prices of similar goods across countries, allowing for influence of
1. Gold was an ideal monetary standard because it was a standard of value and a medium of
exchange.
2. Essence of gold standard was the maintenance of a fixed mint price of national money in
terms of gold. Ensured uniformity of price of gold across nations through process of
arbitrage in gold, each country's price level determined by stock of gold which was
determined by country's real income and money holding habits. Golds flows through
changes in regional money supply would change and set the price to equilibrium. Example:
gold found in nation, price level rises, gold cheaper, gold flows out, stabilizes domestic
prices. This is through balance of trade deficit as domestic prices rise, imports become
more competitive, money flows to foreign nations. This is how the price-specie flow
mechanism kept national prices in line and balance of payments equilibrium.
3. Law of one price: stresses arbitrage in all traded commodities in that this in prices of
commodities across a common currency would influence the prices of similar goods. How
do we reconcile this with arbitrage in gold? Classical economists say gold is more effective
because of special properties. With transaction costs and information costs gold was in 18th
and early 19th best for arbitrage, later 19th with communications tech and development of
international securities and commodity markets, these become more feasible and gold
flows were needed less in adjustment mechanism.
4. Role of capital flows in gold standard adjustment of payments mech. Original idea with
PSFM adjustment was operated through flows of goods and money. later in 19th more
attention to short term capital flows as part of equilibrium mech. As 19th went on capital
flow understood as dominant part of mech.
5. Role of CBs, focus on bank of England, in adjustment mech. Bank's disregard of
domestic money market conditions, as private profit maximizing, maintain as low gold
reserves as possible while protecting itself with bank-rate weapon from golds outflows.
Bagehot criticized, Bagehot's rule of CB management. Gold standard came to be
understood as managed by CBs use of changes in the discount rate to facilitate adjustment
to internal and external gold drains. Discussion of CBs following of rules of the game, that
is, used their adjustment tools to speed up adjustment to external shocks, according to rules
CB of country with gold outflows should work to contract domestic money supply.
6. Proposals for reform to the gold standard.
Schools of thought:
The classical economists:
-Cantillon: writing in 1755, considered money in a quantitative structure, entirely gold and silver
coins. Value determined by market forces: tastes in jewelry etc. and scarcity. In short run
nation’s two key sources of money supply are its balance of payments surplus and domestic
gold/silver production. Identified domestic production from mines would cause inflation, make
imports cheaper and drive balance of trade deficit. This causes domestic outflow and stabilizes:
specie-flow mechanism. Direct expenditure effect: excess supply of money leads to spending
more than income, some directed to foreign goods, money outflow. One-price-law: commodity
arbitrage will ensure same prices of similar goods across countries, allowing for influence of
