The price–specie flow mechanism is a model developed by Scottish economist David Hume (1711–1776) to illustrate how trade imbalances can self-correct and adjust under the gold standard.
But under a gold standard, transactions in the financial account would be conducted in gold—or currency convertible into gold—which would also affect the quantity of money in circulation.
[citation needed] In practice, however, specie flows during the classical gold standard era failed to exhibit the self-corrective behavior described above.
Gold finding its way back from surplus to deficit countries to exploit price differences was a painfully slow process, and central banks found it far more effective to raise or lower domestic price levels by lowering or raising domestic interest rates.
Developed economies deciding to buy or sell domestic assets to international investors also turned out to be more effective in influencing gold flows than the self-correcting mechanism predicted by Hume.