ClassicalGoldStandard:1875-1914*During this period in most major countries:Gold alone was assured of unrestrictedcoinageThere was two-way convertibility betweengold and national currencies at a stableratio. Gold could be freely exported or importedThe exchange rate between two country'scurrencies would be determined by theirrelativegoldcontents
Classical Gold Standard: 1875-1914 ❖During this period in most major countries: ▪ Gold alone was assured of unrestricted coinage ▪ There was two-way convertibility between gold and national currencies at a stable ratio. ▪ Gold could be freely exported or imported. ❖The exchange rate between two country’s currencies would be determined by their relative gold contents
ClassicalGoldStandard:1875-1914For example, if the dollar is pegged togold at U.S.$30 = 1 ounce of gold, andthe British pound is pegged to gold at6 = 1 ounce of gold, it must be thecase that the exchange rate isdetermined by the relative goldcontents:$30 = 6$5 = 1
For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: Classical Gold Standard: 1875-1914 $30 = £6 $5 = £1
Classical Gold Standard:1875-1914Misalignment of exchange rates were correctedbycross-border flows of gold.International imbalances ofpaymentwereautomaticallycorrectedbytheprice-specie-flowmechanism.Highlystableexchangerates undertheclassicalgold standard provided an environment that wasconducive to international trade and investment
Classical Gold Standard: 1875-1914 ❖Misalignment of exchange rates were corrected by cross-border flows of gold. ❖International imbalances of payment were automatically corrected by the price-specie-flow mechanism. ❖Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment
Price Specie-Flow Mechanism (Hume David)MoneyGoldExportlevelPricedeficitoutflosupplyincrease,decreaseInternatWimportdecreasdecreaseionaleimbalanExportsurplusGoldPriceMoneycedecreasinflolevele,correctesupplyWimportincreasedincreaseincreaseRL
Price Specie-Flow Mechanism (Hume David) deficit Gold outflo w Money supply decreas e Price level decrease Export increase, import decrease surplus Gold inflo w Money supply increase Price level increase Export decreas e, import increase Internat ional imbalan ce correcte d