The classical gold standard (approx. 1871–1914) was not merely gold coins in pockets — it was a set of interlocking institutional rules that constrained money creation. Understanding its mechanics reveals why it produced long-run price stability and why it was abandoned.

Three pillars defined the system:

Fixed parity: each currency defined as a weight of gold (e.g., £1 = 113.0 grains fine gold; $1 = 23.22 grains)
Convertibility: central banks bought/sold gold at the fixed price on demand
Free flow: gold moved freely across borders, settling trade imbalances automatically

The price-specie-flow mechanism (David Hume, 1752) self-corrected trade deficits: a deficit country lost gold → money supply fell → prices dropped → exports became competitive → gold flowed back. No central bank needed to act.

Feature	Gold Standard	Fiat System
Money supply anchor	Gold reserves	Central bank policy
Long-run inflation	~0% (1871–1914)	~3% target
Policy flexibility	None	High
Exchange rates	Fixed	Floating