The Working of the Pre-War Gold Standard

IN discussions concerning the post-war gold standard and the possibility of restoring an efficient international monetary system, it is natural to take the operation of the gold standard in pre-war times as a kind of standard. It is therefore of more than historical interest to know exactly how the prewar gold standard did work. The most generally accepted view on this matter-the classical explanation, as it may be conveniently termedmay be summarised 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 connexion 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. We shall not be concerned here to discuss the part played by price and income changes in maintaining international equilibrium. Our concern is with the process by which these price and income changes were brought about, As