ABSTRACT
The advantage of exchange-rate stability is that international trade and investment can be conducted with minimal risk of capital losses due to currency value fluctuations. The empirical evidence points to low rate of inflation among the major countries during the classical gold-standard period. The positive correlation of growth and inflation, except for the sub-period following the First World War, “is suggestive of the importance of demand shocks, which is at odds with the way the classical gold standard period is conventionally portrayed”. The classical gold-standard arrangement, which had begun to emerge in the end of the second decade of the 1800s, collapsed in August 1914, a few weeks after the start of the First World War. By the end of World War I, in 1918, substantial divergences in economic circumstances had developed in different countries: internal rates of inflation varied among nations, as consequence of inflationary policies implemented to finance the war, and wages and prices rose at different rates.
