Hume's mechanism

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Hume mechanism (Hume mechanism) - owes its name to the eighteenth-century philosopher, Scottish writer and economist David Hume. In economics, this is a mechanism for eliminating the balance of payments in the gold standard.

The trade deficit is accompanied by a reduction in the amount of gold and therefore money supply, leading to higher interest rates, capital inflows, falling prices and improving the country's competitiveness on the international scene. Gold sent abroad as a payment for the surplus of imports over exports was converted to coin of a country with a surplus in the balance of payments. The opposite is true in case of trade surplus. While in a country with a deficit, higher interest rates and falling prices have slowed economic activity, in a country with surplus higher inflation has reduced it.

It is one of the characteristics of the functioning of the Gold Standard system, and its cause lies in the freedom of the circulation of gold when regulating the balance of payments. The literal gold currency system, for its part, meant rigid rules for the issuance of money and a system of fixed exchange rates. Hume's trade deficit led to shrinking money supply, and the surplus meant the expansion of this supply. These processes, however, affect trade balancing. The years 1927-1931 were called the era of the "golden ephemeris", whose centers were London and New York City, characterized in particular by the fact that the Hume mechanism was celebrated there. Bibliography

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