PRICE SPECIE ADJUSTMENT MECHANISM:
The matching component of demand / supply for currencies
between two countries would get settled in terms of currencies whereas the net trade
imbalance between two countries would get settled through transfer of gold reserves. This
would result in reduced money supply and commodity prices in the deficit country and
increased money supply and inflation in the surplus country. This would make
commodities more attractive in the deficit country leading to a reversal in the trade
imbalance and help to achieve equilibrium of trade. This in-built mechanism for balancing
trade in the Gold Standard was called ‘Price Specie Adjustment Mechanism’.
What is Price Specie Adjustment Mechanism?
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