ABSTRACT
Although the United Kingdom adopted the gold standard in the early eighteenth century, the period in which the system operated for the large majority of the industrialized countries was from 1880 to 1914. The United States returned to the gold standard in 1879, having abandoned it during the Civil War. Few countries rigidly followed the rules of the specie flow system as described in Chapter 16, but the system did operate in an approximate sense. The operative rule was that whenever a balance of payments deficit occurred and gold was lost, interest rates were raised sufficiently to stop the gold outflow. There was not a rigid linkage between the loss of gold and a proportionate reduction in the stock of base money, as presumed by the specie flow system, but there was a clear linkage from payments disequilibria to monetary policy changes which produced adjustment. The system worked with considerable success because this was a period of relatively free trade, capital account convertibility, peace, and highly competitive markets for both goods and labor. As a result even modest changes in monetary policy produced responses in both the current and capital accounts which shifted the balance of payments back toward equilibrium.
