Specie Flow Mechanism

Discipline: Economics

Outlined by Scottish philosopher David Hume (1711-1776), among others, as an argument against the Mercantilist view that a nation should have a permanent balance of payments surplus. Specie flow mechanism is a corrective mechanism in the Gold Standard by which deficits and surpluses are eliminated by an induced flow of specie.

In its earliest form (as reported by Hume), the drain of gold would lead to a decrease in the quantity of money held by the deficit country; this in turn would lead to a fall in the general level of prices in relation to other countries.

This would make the deficit country's exports more attractive and imports more expensive, resulting eventually in a favourable balance of trade. International monetarism is an analysis developed from monetary analysis, and is similar to the specie-flow approach.

Source:
L Yeager, International Monetary Relations: Theory, History and Policy (New York, 1976)

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