The “rules of the game” is a phrase attributed to Keynes (who in fact first used it in the 1920s). While the “rules” were not explicitly set out, governments and central banks were implicitly expected to behave in a certain manner during the period of the classical gold standard. In addition to setting and maintaining a fixed gold price, freely exchanging gold with other domestic money and permitting free gold imports and exports, central banks were also expected to take steps to facilitate and accelerate the operation of the standard, as described above. It was accepted that the gold standard could be temporarily suspended in times of crisis, such as war, but it was expected that it would be restored again at the same parity as soon as possible afterwards.

In practice, a number of researchers have subsequently shown¹ that central banks did not always follow the “rules of the game” and that gold flows were sometimes “sterilised” by offsetting their impact on domestic money supply by buying or selling domestic assets. Central banks could also affect gold flows by influencing the “gold points”. The gold points were the difference between the price at which gold could be purchased from a local mint or central bank and the cost of exporting it. They largely reflected the costs of financing, insuring and transporting the gold overseas. If the cost of exporting gold was lower than the exchange rate (i.e. the price that gold could be sold abroad) then it was profitable to export gold and vice versa.

A central bank could manipulate the gold points, using so-called “gold devices” in order to increase or decrease the profitability of exporting gold and therefore the flow of gold. For example, a bank wishing to slow an outflow of gold could raise the cost of financing for gold exporters, increase the price at which it sold gold, refuse to sell gold completely or change the location where the gold could be picked up in order to increase transportation costs.

Nevertheless, provided such violations of the “rules” were limited, provided deviations from the official parity were minor and, above all, provided any suspension was for a clear purpose and strictly temporary, the credibility of the system was not put in doubt. Bordo² argues that the gold standard was above all a “commitment” system which effectively ensured that policy makers were kept honest and maintained a commitment to price stability.

One further factor which helped the maintenance of the standard was a degree of cooperation between central banks. For example, the Bank of England (during the Barings crisis of 1890 and again in 1906-7), the US Treasury (1893), and the German Reichsbank (1898) all received assistance from other central banks.

¹For example, Arthur Bloomfield, Monetary Policy Under the Gold Standard, 1880 to 1914, Federal Reserve Bank of New York, 1959; John Dutton, The Bank of England and the Rules of the Game under the International Gold Standard; New Evidence, in “A Retrospective on the Classical Gold Standard, Michael D Bordo and Anna J Schwartz, Eds, NBER, 1984.
²Michael D Bordo, Gold as a Commitment Mechanism: Past. Present and Future, World Gold Council Research Study no. 11, December 1995.