ABSTRACT
THE GOLD STANDARD imposes on the gold standard countries the alternatives of inflation and deflation. The internal price level and the internal value of a national currency, under that standard, are left to the vagaries of the yellow metal. In other words, the external value of a national currency is kept stable at the expense of internal economic stability. Irving Fisher in the United States and John Maynard Keynes in England did most to convince the world that the traditional policy of maintaining exchange stability should be abandoned in favor of internal economic stability (Fisher emphasizing price stability and Keynes income stability). Only under the pressure of the world-wide depression of the 1930’s, however, did nations realize the wisdom of exchange flexibility. Flexible exchange rates are generally associated with autonomous, local monetary systems. A local monetary system is usually a paper standard, but need not be so. In the absence of an international gold standard the external value of national currencies may be made flexible (a) by leaving automatic market forces free to influence it, or (b) by letting the monetary authority deliberately adjust it.
