ABSTRACT
It will be recalled from our earlier discussion that the gold standard is a system in which the rates of exchange are determined by the legally established mint-parity relationships of individual currencies in terms of gold. Exchange rates are not completely fixed by such relationships, however, because of transactions costs involved in the buying and selling of gold. Rather, the rates are constrained at the gold-export and import points, but can vary freely within the relatively narrow confines of these points. It will be recalled further that, in the idealized version of the gold standard, the domestic money supply was supposed to respond passively to the inflow or outflow of gold, and that monetary policy was supposed to reinforce the effects of gold movements on the money supply, depending upon the extant banking-reserve rules. Finally for adjustment to occur, wages, prices, and the rate of interest were assumed to respond to the monetary changes with the result that the balance of trade and the flow of international short-term capital would be altered until gold flows ceased and balance-of-payments equilibrium was restored.
