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Gold standard

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932[1][2] as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system.[3] Many states nonetheless hold substantial gold reserves.[4][5]

For other uses, see Gold standard (disambiguation).

Historically, the silver standard and bimetallism have been more common than the gold standard.[6][7] The shift to an international monetary system based on a gold standard reflected accident, network externalities, and path dependence.[6] Great Britain accidentally adopted a de facto gold standard in 1717 when Isaac Newton, then-master of the Royal Mint, set the exchange rate of silver to gold too low, thus causing silver coins to go out of circulation.[8] As Great Britain became the world's leading financial and commercial power in the 19th century, other states increasingly adopted Britain's monetary system.[8]


The gold standard was largely abandoned during the Great Depression before being re-instated in a limited form as part of the post-World War II Bretton Woods system. The gold standard was abandoned due to its propensity for volatility, as well as the constraints it imposed on governments: by retaining a fixed exchange rate, governments were hamstrung in engaging in expansionary policies to, for example, reduce unemployment during economic recessions.[9][10]


According to a survey of 39 economists, the vast majority (93 percent) agreed that a return to the gold standard would not improve price-stability and employment outcomes,[11] and two-thirds of economic historians reject the idea that the gold standard "was effective in stabilizing prices and moderating business-cycle fluctuations during the nineteenth century."[12] The consensus view among economists is that the gold standard helped prolong and deepen the Great Depression.[13][14] Historically, banking crises were more common during periods under the gold standard while currency crises were less common.[2] According to economist Michael D. Bordo, the gold standard has three benefits that made its use popular during certain historical periods: "its record as a stable nominal anchor; its automaticity; and its role as a credible commitment mechanism."[15] The gold standard is supported by many followers of the Austrian School, free-market libertarians, and some supply-siders.[16]

Implementation

The United Kingdom slipped into a gold specie standard in 1717 by over-valuing gold at 15+15 times its weight in silver. It was unique among nations to use gold in conjunction with clipped, underweight silver shillings, addressed only before the end of the 18th century by the acceptance of gold proxies like token silver coins and banknotes.


From the more widespread acceptance of paper money in the 19th century emerged the gold bullion standard, a system where gold coins do not circulate, but authorities like central banks agree to exchange circulating currency for gold bullion at a fixed price. First emerging in the late 18th century to regulate exchange between London and Edinburgh, Keynes (1913) noted how such a standard became the predominant means of implementing the gold standard internationally in the 1870s.[17]


Restricting the free circulation of gold under the Classical Gold Standard period from the 1870s to 1914 was also needed in countries which decided to implement the gold standard while guaranteeing the exchangeability of huge amounts of legacy silver coins into gold at the fixed rate (rather than valuing publicly held silver at its depreciated value). The term limping standard is often used in countries maintaining significant amounts of silver coin at par with gold, thus an additional element of uncertainty with the currency's value versus gold. The most common silver coins kept at limping standard parity included French 5-franc coins, German 3-mark thalers, Dutch guilders, Indian rupees, and U.S. Morgan dollars.


Lastly, countries may implement a gold exchange standard, where the government guarantees a fixed exchange rate, not to a specified amount of gold, but rather to the currency of another country that is under a gold standard. This became the predominant international standard under the Bretton Woods Agreement from 1945 to 1971 by the fixing of world currencies to the U.S. dollar, the only currency after World War II to be on the gold bullion standard.

Divisibility: Gold as currency was hindered by its small size and rarity, with the dime-sized of 3.4 grams representing 7 days' salary for the highest-paid workers. In contrast, coins of silver and billon (low-grade silver) easily corresponded to daily labor costs and food purchases, making silver more effective as currency and unit of account. In mid-15th century England, most highly paid skilled artisans earned 6d a day (six pence, or 5.4 g silver), and a whole sheep cost 12d. This made the ducat of 40d and the half-ducat of 20d of little use for domestic trade.[22]

ducat

Non-existence of token coinage for gold: Sargent and Velde (1997) explained how token coins of copper or billon exchangeable for silver or gold were almost non-existent before the 19th century. Small change was issued at almost full intrinsic value and without conversion provisions into specie. Tokens of little intrinsic value were widely mistrusted, were viewed as a precursor to currency devaluation, and were easily counterfeited in the pre-industrial era. This made the gold standard impossible anywhere with token silver coins; Britain itself only accepted the latter in the 19th century.

[23]

Non-existence of banknotes: Banknotes were mistrusted as currency in the first half of the 18th century following France's failed banknote issuance in 1716 under . Banknotes only became accepted across Europe with the further maturing of banking institutions, and also as a result of the Napoleonic Wars of the early 19th century. Counterfeiting concerns also applied to banknotes.

economist John Law

1816, : one pound: from 111.37 g silver to 7.32238 g gold; ratio 15.21

British Empire

1873, : one North German thaler or 134 South German gulden of 16.67 g silver, converted to 3 German gold marks of 3/2.79 = 1.0753 g gold; ratio 15.5

German Empire

1873, franc: from 4.5 g silver to 9/31 = 0.29032 g gold; ratio 15.5

Latin Monetary Union

1873, , by the Coinage Act of 1873: from 24.0566 g silver to 1.50463 g gold; ratio 15.99

United States dollar

1875, : Rigsdaler specie of 25.28 g silver, converted to 4 krone (or krona) of 4/2.48 = 1.6129 g gold; ratio 15.67

Scandinavian Monetary Union

1875, Netherlands: the from 9.45 g silver to 0.6048 g gold; ratio 15.625.

Dutch Guilder

1881, : the Ottoman lira

Ottoman Empire

1892, : the Austro-Hungarian florin of 11.11 g silver, converted to two Austro-Hungarian krone of 2/3.28 = 0.60976 g gold; ratio 18.22

Austria-Hungary

1897, : the ruble from 18 g silver to 0.7742 g gold; ratio 23.25.

Russian Empire

Gold Standard Act 1925

An Act to facilitate the return to a gold standard and for purposes connected therewith.

13 May 1925

Abandonment of the gold standard

Impact of World War I

Governments with insufficient tax revenue suspended convertibility repeatedly in the 19th century. The real test, however, came in the form of World War I, a test which "it failed utterly" according to economist Richard Lipsey.[19] The gold specie standard came to an end in the United Kingdom and the rest of the British Empire with the outbreak of World War I.[41]


By the end of 1913, the classical gold standard was at its peak, but World War I caused many countries to suspend or abandon it.[42] According to Lawrence Officer the main cause of the gold standard's failure to resume its previous position after World War I was "the Bank of England's precarious liquidity position and the gold-exchange standard". A run on sterling caused Britain to impose exchange controls that fatally weakened the standard; convertibility was not legally suspended, but gold prices no longer played the role that they did before.[43] In financing the war and abandoning gold, many of the belligerents suffered drastic inflations. Price levels doubled in the U.S. and Britain, tripled in France and quadrupled in Italy. Exchange rates changed less, even though European inflation rates were more severe than America's. This meant that the costs of American goods decreased relative to those in Europe. Between August 1914 and spring of 1915, the dollar value of U.S. exports tripled, and its trade surplus exceeded $1 billion for the first time.[44]


Ultimately, the system could not deal quickly enough with the large deficits and surpluses; this was previously attributed to downward wage rigidity brought about by the advent of unionized labor but is now considered as an inherent fault of the system that arose under the pressures of war and rapid technological change. In any case, prices had not reached equilibrium by the time of the Great Depression, which served to kill off the system completely.[19]


For example, Germany had gone off the gold standard in 1914 and could not effectively return to it because war reparations had cost it much of its gold reserves. During the occupation of the Ruhr the German central bank (Reichsbank) issued enormous sums of non-convertible marks to support workers who were on strike against the French occupation and to buy foreign currency for reparations; this led to the German hyperinflation of the early 1920s and the decimation of the German middle class.


The U.S. did not suspend the gold standard during the war. The newly created Federal Reserve intervened in currency markets and sold bonds to "sterilize" some of the gold imports that would have otherwise increased the stock of money. By 1927 many countries had returned to the gold standard.[39] As a result of World War I the United States, which had been a net debtor country, had become a net creditor by 1919.[45]

Interwar period

The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of World War I, when Treasury notes replaced the circulation of gold sovereigns and gold half sovereigns. Legally, the gold specie standard was not abolished. The end of the gold standard was successfully effected by the Bank of England through appeals to patriotism urging citizens not to redeem paper money for gold specie. It was only in 1925, when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended.


The British Gold Standard Act 1925 both introduced the gold bullion standard and simultaneously repealed the gold specie standard.[46] The new standard ended the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price, but "only in the form of bars containing approximately four hundred ounces troy [12 kg] of fine gold".[47][48] John Maynard Keynes, citing deflationary dangers, argued against resumption of the gold standard.[49] By fixing the price at a level which restored the pre-war exchange rate of US$4.86 per pound sterling, as Chancellor of the Exchequer, Churchill is argued to have made an error that led to depression, unemployment and the 1926 general strike. The decision was described by Andrew Turnbull as a "historic mistake".[50]


The pound left the gold standard in 1931 and a number of currencies of countries that historically had performed a large amount of their trade in sterling were pegged to sterling instead of to gold. The Bank of England took the decision to leave the gold standard abruptly and unilaterally.[51]

Reintroduction

In 2024, Zimbabwe became the first country in the 21st century to use a gold standard for its currency, in order to tackle inflation and create confidence within the economy. The Zimbabwe Gold (ZiG) is backed by US$400 million and 2,522 kg of gold, thus giving a total of US$575 million worth of hard assets. This development came after the Zimdollar crushed based on official rate from US$1:ZWL2.50 at introduction to US$1:ZWL30,672.42 on 5 April 2024, whilst parallel market was trading at US$1:ZWL42,500 at the time of removal.[87]

A gold standard does not allow some types of .[97] Financial repression acts as a mechanism to transfer wealth from creditors to debtors, particularly the governments that practice it. Financial repression is most successful in reducing debt when accompanied by inflation and can be considered a form of taxation.[98][99] In 1966 Alan Greenspan wrote "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."[100]

financial repression

Long-term has been described as one of the virtues of the gold standard,[101] but historical data shows that the magnitude of short run swings in prices were far higher under the gold standard.[102][103][101]

price stability

were less frequent under the gold standard than in periods without the gold standard.[2] However, banking crises were more frequent.[2]

Currency crises

The gold standard provides fixed international exchange rates between participating countries and thus reduces uncertainty in international trade. Historically, imbalances between price levels were offset by a balance-of-payment adjustment mechanism called the "".[104] Gold used to pay for imports reduces the money supply of importing nations, causing deflation, which makes them more competitive, while the importation of gold by net exporters serves to increase their money supply, causing inflation, making them less competitive.[105]

price–specie flow mechanism

Hyper-inflation, a common correlator with government overthrows and economic failures, is more difficult when a gold standard exists. This is because hyper-inflation, by definition, is a loss in trust of failing fiat and those governments that create the fiat.

Bank for International Settlements

International Monetary Fund

United Nations Monetary and Financial Conference

World Bank

1925: Churchill & The Gold Standard - UK Parliament Living Heritage

University of Iowa Center for International Finance and Development

What is The Gold Standard?

Bank of England

History of the Bank of England

Timeline: Gold's history as a currency standard