Trevor J. O. Dick

Balance of payments adjustment under the international gold standard: Canada, 1871–1913

Abstract This paper offers a new interpretation of Canadas balance of payments experience under the gold standard. A portfolio theory of balance of payments adjustment highlighting the significance of international capital flows is shown to explain the historical evidence better than the traditional price-specie-flow mechanism advocated by Jacob Viner. Adjustment occurs preeminently via transactions in the international capital market. Capital flows are not a response to domestic/foreign interest rate differentials. Canadas investment boom and capital inflow produced changes in domestic relative to foreign prices in violation of purchasing power parity. The theoretical background of the new interpretation is an extension of the monetary approach to balance of payments theory.