price-specie-flow adjustment mechanism

The price-specie-flow mechanism, a classical economic theory, describes how international trade imbalances are automatically corrected through the movement of gold or silver (specie). If a country has a trade deficit, gold flows out, reducing its domestic money supply. This decrease in money supply leads to lower prices, making exports cheaper and imports more expensive, thus correcting the deficit.1

Conversely, a trade surplus would cause gold to flow in, increasing the money supply, raising prices, and consequently reducing exports while increasing imports until equilibrium is restored. Critics questioned whether specie flows would have a significant enough impact on prices and expressed concern that a reduced money supply could negatively affect economic activity and lead to unemployment.1