How the Gold Standard Worked, 1880–1913

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 importables, or of Ohlin, involving changes in income. The theoretical jumble is made still more confusing by a number of factual anomalies uncovered lately. ¹ Among other difficulties with the orthodox views, it has been found that the gold standard, even in its heyday, was a standard involving the major currencies as well as gold itself, and that few, if any, central banks followed the putative rules of the game.