ABSTRACT
The most generally accepted view on this matter-the classical explanation, as it may be conveniently termed-may be summarized as follows. A condition of balance of payments disequilibrium led, if more than temporary, to an international gold movement: the gold movement induced changes in the volume of monetary circulation in the countries concerned, a contraction here and an expansion there: the changes in circulation brought about the changes in incomes and prices required to adjust the balance of trade. In establishing a connection between the gold movement and the change in the volume of circulation, it is necessary to take account of the nature of the currency system involved. As credit means of payment, bank liabilities in the form of notes and deposits, have long been the most important forms of money in the more advanced countries, the effect of a gold movement there depended on the reaction of the banking system to a change in its reserves; and in so far as a given change in reserves called for a multiple change in the bank liabilities, the process normally involved a change in the terms on which the banks lent, or the discount rate.
