Dollar Crisis - part 1

1. Gold Trade created equilibrium in the trade deficit. Here's how it worked. Gold leaves the country to pay for the commodity. Since gold leaves credit would have to contract. The economy would recede. Price would become cheaper and gold would enter back into the country as exports of cheap products were purchased by foreign countries with gold payments. The inflow and outflow gold would seek equilibrium. A country experiencing a trade imbalance would accumulate more gold, the surplus would be credit, expanding credit would fuel an economic boom, provoke inflating prices, and inflated prices would slow down exports and import rise. 2. Gold reserves prevented budget deficits. With only a limited amount of credit available to the government, borrowing would drive up interest rates making it more difficult for business to borrow money. The government would crowd out the private sector with its borrowing. Government deficits also tend to result in trade deficits and gold outflows. Initially the government spending would stimulate the economy and import increase inline with the growth of the economy; however, as gold left the country recession pressures would return, gold would leave the country, interest rates rise, and price fall. Recognizing the undesirable effect deficit spending would have on the economy the government would attempt to maintain balanced budget as long as the country was at peace.