Gold automatism
Under price-specie flow mechanism , an automatic balancing mechanism for the balance of payments in commercial transactions between countries with gold understood or gold currencies. The concept proposed in particular by David Hume came e.g. B. used during the period of validity of the so-called gold standard until 1914.
Hume's remarks on gold automatism
The gold standard includes many strong, automatic mechanisms. These work towards a simultaneous balance of payments equilibrium in all countries. The most important of these is the gold automatism (gold currency mechanism), which was explained in 1752 by David Hume , a Scottish philosopher.
"Assuming that four-fifths of all money in Britain were destroyed overnight, meaning that the nation was in the same condition as it was when the Henry and Edward reigned , what could the effect be?" ? The price of all labor and goods would have to fall accordingly and be sold as cheaply as at that time. The question arises as to whether a nation could then compete with us in foreign markets or operate shipping or sell goods at comparable prices so that sufficient profit can be made. In what period then could the money that was lost be brought back to raise us to the level of all neighboring nations? If we had achieved this, however, all advantage through cheap labor and goods would be lost and the further flow of money would be slowed down by abundance and satiety. If one were to continue to suspect that all of Great Britain's money would multiply fivefold overnight, the opposite effect could then occur. All work and goods would rise to infinite heights and no neighboring region would be able to buy our goods. Again, their goods would become so cheap that they would inundate us with them and drain our money. The consequence would be that we would sink on a level with the foreigners and lose the great superiority in wealth that would have brought us such disadvantages? "
Hume's description of the gold automatism translated means that the current surplus of the UK's current and capital account is assumed to exceed the deficit of the financial account (excluding currency reserves). Because UK overseas net imports are not entirely financed by UK loans, some of it has to come from the inflow of international reserves - i.e. H. Gold - to be covered to the UK. The increase in gold automatically lowers the foreign money supply and expands the British money supply. As a result, overseas prices are going down and UK prices are being pushed up. Hume showed that the price level and the money supply develop proportionally in the long term.
The simultaneous rise in UK prices and the fall in foreign prices both lower foreign demand for British goods and services and, at the same time, increase British demand for foreign goods and services. These shifts in demand lead to a reduction in the UK current surplus and foreign current account deficit. Therefore, reserve movements come to a standstill over a longer period of time and both countries achieve balance of payments equilibrium. The process works the other way too, eliminating a situation where there is a surplus abroad and a deficit in the UK.
Relation to the money supply price mechanism
This mechanism was originally developed under the assumptions of the gold standard. In this currency system, the central banks are obliged to buy and sell gold at a fixed price. Therefore, there is a fixed relationship in the countries between the unit of weight gold and the nominal value of the respective currency unit. This also determines the exchange rate: if all currencies are in a fixed relationship to gold, they are also in a fixed relationship to one another.
In Hume's work Political Discources , for example, he dealt with the role of money and interest in the economy, international trade policy or the financing of the state via taxes and credits. If you look at the discussions about the meaning of money, everyone agrees that money is indispensable as a medium of exchange for national and international trade, otherwise the specialization of production and exchange will be completely unprofitable or the profits from the exchange will even be completely lost went. Hume emphasizes this argument in his Essay Of Money . He equates the means of exchange, namely money, with gold and silver coins, i.e. with hard money, and distrusts paper money if it cannot be converted into hard money immediately. Furthermore, it is agreed that there is a connection between the change in the money supply and a change in the price level. However, there is disagreement about the exact mechanism and the exact quantitative relationship over time in which the change in money supply causes price changes. Hume found that, over a longer period of time, the supply of money rose more slowly than prices. This results in a fixed relationship between money and price, but not a proportional one. According to Hume's explanation, it is because every price adjustment takes time and a gradual increase in demand that arises from an increased supply of money can be offset by adjusting the supply of goods. Hume concludes: “The well-being of a state does not depend on whether the money is available in greater or lesser amounts. The correct policy of the government is to increase the supply of money if possible, for this will maintain industry in the nation and increase the labor potential, which forms the real economic power and wealth. "
In his essay On Republic Credit , Hume suggests that the state should not rely solely on increasing paper money as a means of controlling the supply of money. Growing public debt and the issuance of government bonds would only lower confidence in the currency and trigger inflation rather than expand production. The government could only influence its money supply, that is to say the amount of gold and silver coins, if it created conditions that would enable the citizens to expand and develop trade with the money owners or the gold and silver producers. “A government has good reasons to treat its citizens and manufactories with care. In matters of money she can safely rely on the course of events ”(from the essay Of the Balance of Trade ). Hume's view of money is the starting point to discuss another important economic problem, namely Hume's theory of interest. In its time it was considered a well-established thesis that one of the advantages of increasing the money supply was the lowering of the interest rate. Hume asks how one can test the statement. Assuming the claim is true, countries with a relatively large amount of money must have relatively low interest rates. But this is not the case. He notes that this assumption is implausible anyway. Doubling the amount of money just means borrowing a greater amount of labor and goods and repaying the equivalent value of money plus interest, with interest being a certain fraction of the money equivalent. There is no reason to believe that this proportion of money's value would change simply because the value of labor or commodities (expressed in money) changed.
Relation to quantity theory
Hume's description is based on the quantity theory of prices, a key theory on the general price level that macroeconomics deals with. “The quantity theory says that the domestic price level changes develop in the same direction as the changes in the money supply in relation to the money demand.” Under the gold standard, gold was an important part of the money supply, either directly, in the form of gold coins, or indirectly if the States used gold to cover their paper money . Hume's theory of balancing payments:
Suppose the US had a large foreign trade deficit and therefore started losing gold. True to quantity theory, this loss of gold reduces the American money supply, thereby lowering prices and costs in the United States. As a result, the US is reducing its imports of British and other foreign goods. These have become relatively more expensive. Since the goods produced in the USA have become relatively cheap on world markets, American exports are increasing .
The opposite effect occurs in the UK and other countries. If there is a huge increase in British exports, the country will receive gold in return. The British money supply is increasing. This, according to quantity theory, drives up UK prices and costs. Two other phases of the Hume Mechanism are added: British and other foreign exports have become more expensive, so the volume of goods exported to the US and other countries is decreasing. British citizens are now importing greater quantities of cheap American goods in the face of higher domestic prices. The result is an improvement in the balance of payments of the country that loses gold and a deterioration in the balance of payments of the country that wins gold.
Hume and the Mercantilists
The second starting point of Hume's monetary theory is found in his analysis of international trade. Hume examined the well-known mercantilist view that international trade and payments must be subjected to severe restrictions, otherwise Great Britain could threaten impoverishment and a shortage of its gold standard as a result of balance of payments deficits. Hume refuted their arguments by showing that the adjustment of the balance of payments would automatically ensure an adequate supply of money in all countries. Mercantilism saw silver and gold as the mainstays of national prosperity and the essential prerequisite for lively trade. Hence, any outflow of precious metals caused great concern to the mercantilists. Its main political aim was to maintain a steady balance of payments surplus.
Hume showed that a permanent excess is impossible. As the influx of precious metals increases domestic prices and balances the balance of payments, the surplus disappears over time. Likewise, a lack of means of payment lowers domestic prices and produces a surplus in payment transactions with foreign countries. This brings money into the country in the required amount. According to Hume, any intervention by the state in international trade would damage the national economy without creating the increase in "prosperity and wealth" that the mercantilists had in mind. Hume pointed out that the mercantilists overestimated a single and relatively minor component of national prosperity, precious metals, while overlooking its most important source, productive capacity.
Emergence
If the demand for its currency in a country increases faster than the supply, e.g. B. because this country exports a lot, the exchange rate of this currency rises to the so-called "gold point". If this gold point is reached, it is "cheaper" for the importer to pay directly in gold instead of in the currency of the respective exporting country, since the rate of increase in this currency is higher than the transport and insurance costs for the gold transport to the exporting country. This reduces the amount of gold in the importing country and increases the same in the exporting country. Since in countries with gold currencies, the amount of gold equals the amount of money, the amount of money in the importing country is also reduced.
Implicit requirements
The prerequisites for the functioning of the gold automatism are elastic prices and wages. H. in the event of an increase in money and thus gold in an economy through an export surplus, prices and wages must rise there or vice versa. Another requirement is international free trade , i. H. no tariffs or other import and trade restrictions and finally world peace and trust.
Effects
As a result of the reduction in the amount of money and thus gold in the importing country, prices there tend to decline ( deflation ) and the importing country becomes more competitive. In contrast, the amount of money and gold in the exporting country increases, which leads to higher prices there (inflation) and reduces competitiveness on the world market. This mechanism achieves, at least theoretically, that the economies that have a gold currency tend to develop evenly and that the balance of payments of the participating economies remain balanced in the long term. This system ensures that no national economy can gain a competitive advantage on the world market by unilaterally devaluing its own currency . A one-sided devaluation is therefore not possible, since in gold currency countries the amount of gold equals the amount of money and thus the amount of money cannot be influenced by administrative measures by a government or central bank.
"Rules of the game" of the gold standard
The gold automatism could theoretically work by itself, but the measures taken by the central banks reinforced it, since they also worked towards a balance of payments equilibrium in all countries. The reactions of the central banks to inflows and outflows of gold also represented a mechanism. Central banks with permanent gold losses ran the risk of at some point no longer being able to meet their obligations to exchange banknotes. They therefore sought to sell domestic assets, raise interest rates, and attract foreign capital during periods of gold loss. Central banks that were able to register an inflow of money felt a far lower incentive to stop their imports of the precious metal. The main incentive was the higher returns on interest-bearing domestic assets compared to gold. A central bank that accumulated gold was tempted to purchase domestic assets in order to lower domestic interest rates, increase capital outflows, and drive gold overseas.
Individual evidence
- ^ Paul R. Krugman and Maurice Obstfeld, International Economy Theory and Politics of Foreign Trade, 2009, p. 661.
- ↑ David Hume: Political and Economic Essays, translation by Susanne Fischer, S.234; 235; David Hume, Political Discourses, p. 82; 83
- ^ Paul R. Krugman and Maurice Obstfeld, International Economy Theory and Politics of Foreign Trade, 2009, p. 662.
- ↑ Klaus Rose and Karlhans Sauernheimer, Theory of Foreign Trade, 2006, p. 106.
- ^ Alan Peacock and Ernst Topitsch, David Hume in our time - Vadecum on an early classic, 1987, pp. 48–52
- ^ Paul A. Samuelson and William D. Nordhaus, Volkswirtschaftslehre - The international standard work of macro and microeconomics; Translation from the American by Regina Berger, Annemarie Pumpernig and Brigitte Hilgner, 2007, p. 853.
- ↑ Helmut Wagner, Introduction to World Economic Policy, 2009, p. 187.
- ^ Paul A. Samuelson and William D. Nordhaus, Volkswirtschaftslehre - The international standard work of macro and microeconomics; Translation from the American by Regina Berger, Annemarie Pumpernig and Brigitte Hilgner, 2007, p.853; 854
- ↑ Alan Peacock and Ernst Topitsch, David Hume in our time - Vadecum to an early classic, 1987, p.54; 55
- ↑ Paul R. Krugman and Maurice Obstfeld, International Economy Theory and Politics of Foreign Trade, 2009, p. 664.
- ^ Paul R. Krugman and Maurice Obstfeld, International Economy Theory and Politics of Foreign Trade, 2009, p. 663.