Monetary policy, however, was supposed to reinforce the effects of these automatic mechanisms for adjusting external payments, not hinder them. Holders of inventories financed through borrowing, on the one hand, saw the burden of interest increase and the renewal of loans become more difficult. This resulted in a decline in the general price level in the domestic market, which restrained imports and stimulated exports, thereby correcting the unfavorable external balance that constituted the main source of difficulty. Conversely, the central bank was expected to lower the discount rate and ease access to credit when an inflow of gold occurred as a result of a surplus in external payments. The primary objective was therefore external balance, which was restored automatically at the cost of inflationary and deflationary pressures borne by the national economy. It was nevertheless assumed that the flexibility of these mechanisms was sufficient for prices and costs to adjust rapidly upward or downward, so that income and employment levels would not alone absorb shocks coming from abroad. Thanks to the gold standard, the nineteenth century experienced remarkable exchange rate stability and economic development that was not obstructed by insurmountable imbalances in international trade. This, at least, is the thesis advanced by defenders of the gold standard.
The authors of the Cunliffe Report conclude:
We find the same note of optimism in the writings of Jacques Rueff in Défense et illustration de l’étalon:
“I would merely like them to understand that it is essentially through a variation in internal purchasing power that the phenomena tending to maintain balance-of-payments equilibrium are set in motion. When there is no way to purchase national output at prevailing prices, prices must fall, and it is this fall in prices that stimulates exports or restrains imports. Variations in purchasing power, in the gold standard system, are essentially the consequence of gold transfers; but they will certainly produce their normal effect only if gold transfers actually take place and if their influence is not systematically offset by movements of opposite sign in the overall volume of credit. What must be borne in mind is that the system, when allowed to operate, can only be fully effective, since the influence that tends to restore equilibrium will continue to develop until equilibrium has in fact been restored.”
“In reality, the gold standard is already a relic of barbarous times. All of us, from the Governor of the Bank of England to the humblest among us, have a paramount interest in ensuring stability in business, prices, and employment, and it is unlikely that, when faced with a choice, we would deliberately sacrifice these objectives to a worn-out dogma once defined at £3 17s. 10½d per ounce.” Criticizing advocates of a return to gold. But let us set aside the weapons of the pamphleteer, for between pure faith and agnosticism there is room for an analysis of the facts. What can be said about the functioning of the gold standard in the nineteenth century? Was it this marvelous mechanism generating general equilibrium, or did it instead play only a more modest role in the history of the industrialization of capitalist countries?
Had gold played the primordial role so often attributed to it, capitalist countries in the nineteenth century would have been paralyzed. Gold circulates both domestically and internationally, to the benefit of economic activity. After all, what were the means of payment in a rapidly growing world? Had it been necessary to rely exclusively on the yellow metal, the quantity of money would soon have been insufficient and cumbersome to handle. Within countries, bank credit and deposits replaced gold through the use of checks, while at the global level the pound sterling acquired the status of an international currency long before the notion of a gold exchange standard was discussed at the Genoa Conference in 1922.
Defenders of the gold standard implicitly admit that the yellow metal was the principal form of money; at the very least, none of them is known to have carried out a statistical investigation into the volume and structure of the money supply in circulation in this or that country, or into the volume and structure of international liquidity. Suppose that from 1844 onward British banks had been unable to expand the volume of credit and, consequently, of deposits mobilizable by check; the money supply, closely tied to gold reserves and their fluctuations, would have been insufficient to finance a rapidly developing economy. If gold had been the only true form of money, the progress of industrialization would have been hindered. It was thanks to the use of checks and the expansion of bank money that this difficulty was overcome. According to estimates by Robert Triffin, bank money—that is, the volume of demand and time deposits—represented at the beginning of the nineteenth century only about one third of the total money supply in circulation in the major countries of the world. Silver was at that time far more important than gold as a monetary medium, but this situation was reversed in the second half of the century. By 1913, the volume of banknotes and deposits in the world far exceeded that of metallic money, with gold accounting for only a small share. This evolution in no way reflects the preeminence of gold or its fundamental role in adjustment mechanisms.