A Note on the Working of the Gold Standard

Abstract

MR. P. B. WHALE, in ECONOMICA for February, I937, presents an argument which, if correct, vitiates both the neo-classical theory of the working of the pre-war gold standard and the newer monetary theorists' criticisms of the gold standard. He seems to prove that the changes in incomes, prices, and volume of payments necessary to bring about adjustment to a shift of demand for a country's exports come about spontaneously, instead of being forced by changes in interest rates. The inference is that the gold standard could be (and, indeed, was) maintained without playing the rules as we have customarily defined them. This means that to some extent at least (Mr. Whale is never clear to what extent) the various central banks on the gold standard could adjust their discount rates independently of the movements in the international accounts. Mr. Whale starts his disruption of international equilibrium by assuming a decline in the demand for one country's exports and, following Mr. Harrod, the resulting decline in income is traced from exporters through the rest of the economy. In the absence of counteracting influences, the contraction of incomes must proceed far enough and last long enough to restore the balance of payments. But incomes may be restored by dishoarding, in which case gold must flow out of the country and thus bring about lower prices of all goods, including the country's export goods. This is a particular case in which the operation of the two general types of corrective factors, shifts of demand (due to income changes) and shifts in relative prices, are put into a time sequence. It is perfectly good classical theory and, in its modern form, may be traced