I am reading Murray's Rothbard What has government done to our money? and this is his reasoning for inflation leading to loss of gold reserves to other countries (assuming everyone is on gold standard)

Lets assume everyone is on gold standard. Then

  1. Credit expansion in country A
  2. Prices in A increase
  3. Increase in imports from country B because foreign goods become cheaper
  4. Country B redeems A's currency for gold. Hence gold outflow from A to B.

What I am confused about is how does inflation lead to increase in imports in 3. As monetary supply increases, A's currency would lose purchasing power and so imports would become equally expensive at that point. Why would that not be the case?


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    $\begingroup$ If both countries are using the gold standard then exchange rates are fixed -- A's currency won't naturally lose purchasing power through devaluation. $\endgroup$ – Dan Jul 23 '19 at 10:54

Inflation won't necessarily change the price of goods from country B in real terms, but it will change the relative costs of buying goods from country B now vs saving now and buying goods from country B later.

Under the gold standard, there are no central banks to force the interest rate up when inflation rises. If inflation goes up but interest rates don't go up, then consumers in country A will save less and spend more, leading to a temporary increase in imports from country B.

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