Editing Gold standard (section)

==="Rules of the Game"===
In the 1920s [[John Maynard Keynes]] retrospectively developed the phrase "rules of the game" to describe how central banks would ideally implement a gold standard during the prewar classical era, assuming international trade flows followed the ideal [[price–specie flow mechanism]]. Violations of the "rules" actually observed during the classical gold standard era from 1873 to 1914, however, reveal how much more powerful national central banks actually are in influencing price levels and specie flows, compared to the "self-correcting" flows predicted by the price-specie flow mechanism.<ref name="GSW">{{Cite web|quote=How the Gold Standard Worked:<br/><br/>In theory, international settlement in gold meant that the international monetary system based on the Gold Standard was self-correcting.<br/><br/> ... although in practice it was more complex. ... The main tool was the discount rate (...) which would in turn influence market interest rates. A rise in interest rates would speed up the adjustment process through two channels. First, it would make borrowing more expensive, reducing investment spending and domestic demand, which in turn would put downward pressure on domestic prices, ... Second, higher interest rates would attract money from abroad, ... The central bank could also directly affect the amount of money in circulation by buying or selling domestic assets ... <br/><br/>The use of such methods meant that any correction of an economic imbalance would be accelerated and normally it would not be necessary to wait for the point at which substantial quantities of gold needed to be transported from one country to another. |url=https://www.gold.org/about-gold/history-of-gold/the-gold-standard |access-date=2022-04-16 |title=The Classical Gold Standard |work=World Gold Council |via=www.gold.org}}</ref>

Keynes premised the "rules of the game" on best practices of central banks to implement the pre-1914 international gold standard, namely:
* To substitute gold with fiat currency in circulation, so that gold reserves may be centralized
* To actually allow a prudently determined ratio of gold reserves to fiat currency of less than 100%, with the difference made up by other loans and invested assets, such reserve ratio amounts consistent with [[fractional reserve banking]] practices
* To exchange circulating currency for gold or other foreign currencies at a fixed gold price, and to freely permit gold imports and exports
* Central banks were actually allowed modest margins in exchange rates to reflect gold delivery costs while still adhering to the gold standard. To illustrate this point, France may ideally allow the [[pound sterling]] (worth 25.22 francs based on ratios of their gold content) to trade between so-called ''gold points'' of 25.02F to 25.42F (plus or minus an assumed 0.20F/£ in gold delivery costs). France prevents sterling from climbing above 25.42F by delivering gold worth 25.22F or £1 (spending 0.20F for delivery), and from falling below 25.02F by the reverse process of ordering £1 in gold worth 25.22F in France (and again, minus 0.20F in costs).
* Finally, central banks were authorized to suspend the gold standard in times of war until it could be restored again as the contingency subsides.

Central banks were also expected to maintain the gold standard on the ideal assumption of international trade operating under the [[price–specie flow mechanism]] proposed by economist [[David Hume]] wherein:
* Countries which exported more goods would receive specie (gold or silver) inflows, at the expense of countries which imported those goods.
* More specie in exporting countries will result in higher price levels there, and conversely in lower price levels amongst countries spending their specie.
* Price disparities will self-correct as lower prices in specie-deficient will attract spending from specie-rich countries, until price levels in both places equalize again.

In practice, however, specie flows during the classical gold standard era failed to exhibit the self-corrective behavior described above. Gold finding its way back from surplus to deficit countries to exploit price differences was a painfully slow process, and central banks found it far more effective to raise or lower domestic price levels by lowering or raising domestic interest rates. High price level countries may raise interest rates to lower domestic demand and prices, but it may also trigger gold inflows from investors – contradicting the premise that gold will flow out of countries with high price levels. Developed economies deciding to buy or sell domestic assets to international investors also turned out to be more effective in influencing gold flows than the self-correcting mechanism predicted by Hume.<ref name="GSW" />

Another set of violations to the "rules of the game" involved central banks not intervening in a timely manner even as exchange rates went outside the "gold points" (in the example above, cases existed of the pound climbing above 25.42 francs or falling below 25.02 francs). Central banks were found to pursue other objectives other than fixed exchange rates to gold (like e.g., lower domestic prices, or stopping huge gold outflows), though such behavior is limited by public credibility on their adherence to the gold standard. Keynes described such violations occurring before 1913 by French banks limiting gold payouts to 200 francs per head and charging a 1% premium, and by the German Reichsbank partially suspending free payment in gold, though "covertly and with shame".<ref name="Keynes gold" />

Some countries had limited success in implementing the gold standard even while disregarding such "rules of the game" in its pursuit of other monetary policy objectives. Inside the [[Latin Monetary Union]], the [[Italian lira]] and the [[Spanish peseta]] traded outside typical gold-standard levels of 25.02–25.42F/£ for extended periods of time:<ref>{{cite book |title=European Currency and Finance |publisher=United States Congress Commission of Gold and Silver Inquiry |first=John |last=Parke Young |year=1925 |url=https://books.google.com/books?id=ytFEAQAAMAAJ&pg=PA253}} Vol. I: Italy, p. 347; Vol. II: Spain p. 223.</ref>
* Italy tolerated in 1866 the issuance of {{lang|it|corso forzoso}} (forced legal tender paper currency) worth less than the Latin Monetary Union franc. It also flooded the Union with low-valued subsidiary silver coins worth less than the franc. For the rest of the 19th century the [[Italian lira]] traded at a fluctuating discount versus the standard gold franc.
* In 1883 the [[Spanish peseta]] went off the gold standard and traded below parity with the gold [[French franc]]. However, as the free minting of silver was suspended to the general public, the peseta had a floating exchange rate between the value of the gold franc and the silver franc. The Spanish government captured all profits from minting {{lang|es|duros}} (5-peseta coins) out of silver bought for less than 5 ptas. While total issuance was limited to prevent the peseta from falling below the silver franc, the abundance of {{lang|es|duros}} in circulation prevented the peseta from returning at par with the gold franc. Spain's system where the silver {{lang|es|duro}} traded at a premium above its metallic value due to relative scarcity is called the ''fiduciary standard'' and was similarly implemented in the Philippines and other Spanish colonies in the end of the 19th century.<ref>{{cite journal |page=31 |url=https://www.researchgate.net/publication/231884087 |title=The Philippine currency system during the American colonial period: Transformation from the gold exchange standard to the dollar exchange standard |date=January 2010 |journal=International Journal of Asian Studies |volume=7 |issue=1 |doi=10.1017/S1479591409990428 |first=Yoshiko |last=Nagano |s2cid=154276782 }}</ref>