Lessons from the Gold Standard Experience

It is clear from the preceding chapters that, although it was never defined in those terms, the classical gold standard combined all the basic characteristics of a quasi monetary union. Capital, in both the short and the long term, moved freely between countries. The same was also true of labour. The exchange rates of countries which adopted the standard were ‘irrevocably’ fixed to each other within very narrow margins where they were expected to remain indefinitely. There were no provisions for exchange rates to be changed under any circumstances, no matter how ‘exceptional’. This meant that, in principle, external balances had to take precedence over internal ones irrespective of losses in output, employment and income that such a commitment involved. A country with serious adjustment problems and unwilling to tolerate such losses for long had either to find a way of reconciling the two balances without sacrificing economic welfare or abandon the standard. There was no other alternative.