Using a theory called the quantity theory of money, Hume argued that in countries where the quantity of money increases, inflation would set in and the prices of goods and services would tend to rise while in countries where the money supply decreases, deflation would occur as the prices of goods and services fell.
The higher prices would, in the countries with a positive balance of trade, cause exports to decrease and imports to increase, which will alter the balance of trade downwards towards a neutral balance. Inversely, in countries with a negative balance of trade, the lower prices would cause exports to increase and imports to decrease, which will heighten the balance of trade towards a neutral balance. These adjustments in the balance of trade will continue until the balance of trade equals zero in all countries involved in the exchange.
The price–specie flow mechanism can also be applied to a state's entire balance of payments, which accounts not only for the value of net exports and similar transactions (the current account), but also the financial account, which accounts for flows of financial assets across countries, and the capital account, which accounts for non-market and other special international transactions. 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 in each country.
In either case, there is a change in the price level that automatically offsets the initial current account imbalance. There is no need for central bank action or international policy coordination. In fact, the US did not even have a central bank until 1913!.
Although this mechanism is still taught today as a key feature of the gold standard, whether it really functioned like this is highly questionable. Evidence strongly suggests otherwise.
The biggest problem with this explanation is its total neglect of capital mobility; it is focused on the current account and price competitiveness only.