The Operation of the Gold Standard in the Core and the Periphery Before the First World War

This paper examines the operation of the gold standard (GS) during the period 1870-1914, its heyday. It discusses the theory of balance of payments adjustment under the GS. Theory postulates automatic and symmetric adjustment by deficit and surplus countries. The paper then analyses the experience with adjustment. It analyses whether central banks followed “the rules of the game†. It finds not only significant differences between adjustment in the core countries and in the countries in the periphery, but significant differences among the core countries also. It also finds that countries in the periphery accumulated large reserves to cope with balance of payments deficits just as they today, even though at that time the core countries adopted fixed exchange rates and today they adopt floating exchange rates.