The Fisher effect – the correlation between nominal interest rates and expected inflation – is hard to detect before 1914 because inflation was a white noise process whereas, later in the twentieth century, when inflation became more persistent, it became more apparent#
By limiting the lender of last resort to rediscounting only such paper as arose from “actual commercial transactions” as opposed to paper arising from “speculative transactions” (i.e., loans backed by stock market collateral), the Federal Reserve Act sustained the real bills doctrine but, in so doing, it confused the elasticity of one component of the money stock relative to another and the elasticity of the total.#
The cooperation that did occur [during the classical gold standard] was episodic, ad hoc, and not an integral part of the operation of the gold standard. Of greater importance is that, during periods of financial crisis, private capital flows aided the Bank. Such stabilizing capital movements likely reflected market participants’ belief in the credibility of England’s commitment to convertibility.#
Adjustment to balance of payments disturbances was greatly facilitated by short-term capital flows. Capital would quickly flow between countries to iron out interest rate differences. By the end of the nineteenth century the world capital market was so efficient that capital flows largely replaced gold flows in effecting adjustment.#