Gold reserves prevented budget deficits. With only a limited amount of credit available to the government, borrowing would drive up interest rates making it more difficult for business to borrow money. The government would crowd out the private sector with its borrowing. Government deficits also tend to result in trade deficits and gold outflows. Initially the government spending would stimulate the economy and import increase inline with the growth of the economy; however, as gold left the country recession pressures would return, gold would leave the country, interest rates rise, and price fall. Recognizing the undesirable effect deficit spending would have on the economy the government would attempt to maintain balanced budget as long as the country was at peace[Learn More ...]

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