The gold standard disciplined inflation through the threat of mass currency dumping.

Evidence

Since each country is pegged to gold at a fixed rate, when you earn foreign currency through trade, you can, in principle, take it back to the issuing country’s central bank and ask for the gold that backs it. Because the paper you now hold is convertible for gold at a fixed rate, the paper will be exactly equal in value to gold. So long as this promise of convertibility is maintained, you don’t have to worry about the value of the paper you are holding. If, however, a country on gold decides to run the printing presses to pay for imports in excess of their gold reserves, then that excess currency will show up in the countries exporting to these inflationistas. … Their reserves, sometimes called their “gold cover,” would be insufficient to cope with demand. This would call everyone’s attention to the fact that the issuing country is inflating its currency—issuing more than can be backed by gold at the fixed rate. This would cause people to lose confidence in that currency and dump it en masse, ending convertibility, and wrecking the offending economy in the process. Being on gold therefore gave holders of a foreign currency a “credible” signal that the money was “sound,” so long as convertibility was maintained. — Mark Blyth, Austerity, 488

Categorization

• DEFINE: Explains ‘gold cover’ and how the convertibility promise functioned as a credibility mechanism.
• XREF: Directly grounds the monetary framework later books on austerity (Mattei) build on — gold standard as the disciplinary anchor. — connects to: Power suffers inflation when threats are not backed by enforcement

Broader Connections

• Power suffers inflation when threats are not backed by enforcement #expands (0.78)