rules of the game

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A historical name for the rules under which the gold standard was supposed to operate. Under the ‘rules of the game’, countries losing gold were supposed to raise their interest rates and cut their money supply; countries gaining gold were supposed to cut interest rates and increase their money supply. These rules were intended to restore equilibrium in the balance of payments fairly quickly. However, the incentive to obey these rules was much greater for the countries losing gold, who were in danger of running out of foreign exchange reserves, than for the countries gaining gold. The countries gaining gold could afford to insulate their domestic economies from its inflationary effects by sterilizing the increase in their exchange reserves, and often did so; the countries losing reserves could not afford to sterilize the effects for long. This imparted a deflationary bias to the gold standard system as a whole. See also sterilization.

Subjects: Economics.

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