This diagram drawn up by Harvard economist Dani Rodrik to explain what is sometimes called the "trilemma" of international economic policy, sometimes the "impossible trinity". In an ideal world, you might strive towards all of the three objectives in the boxes above. You might want fixed exchange rates so that you can predictably trade with your neighbours. You would want to have complete capital mobility, so people can bring money in and out of your country at will, helping foster investment. You might want to be able to control your own monetary policy, moving interest rates as necessary to shield you from recessions or from overheating.
The problem is that while you can have two, it's impossible to have all three of these at any one time. It simply doesn't work.
The Gold Standard, as you have probably already spotted above, had both fixed exchange rates (fixed, of course, to gold) and free movement of capital, but in order to achieve this, each member state had to give up setting its own monetary policy. This makes sense - it had to control the speed of its economy based not on whether it was overheating or slumping but on how much gold it had in its vaults, and whether it was enough to satisfy demand for its currency.
As a result, countries in the Gold Standard frequently had to impose deflation – wage cuts and unemployment – on their economies in order to keep their currencies fixed to gold. That was feasible when they couldn't answer back, but following the era of the mass franchise, people understandably lost their patience with such a system. They lost patience with a system which would impose extra unemployment on them simply because some nameless central bankers decided that should be the case.
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