The Classic Gold Standard: 1870–1914

Abstract

Debates on issues about the economy, growth, inequality, fiscal responsibility, and financial crises frequently reduce to debates about money. Moreover, debates about money often reduce to the soundness of money, meaning the ability of a unit of currency to retain its value. Eventually, discussions about soundness touch on the classic era of the gold standard. The aims of this note are to (1) describe the mechanism of the international monetary system known as the gold standard during the time that it had the greatest influence on the global economy; (2) place the gold standard in context with other systems that preceded and followed it; and (3) dispel some enduring misconceptions. Excerpt UVA-F-1921 Nov. 7, 2019 The Classic Gold Standard: 1870–1914 Debates on issues about the economy, growth, inequality, fiscal responsibility, and financial crises frequently reduce to debates about money. Moreover, debates about money often reduce to the soundness of money, meaning the ability of a unit of currency to retain its value. Eventually, discussions about soundness touch on the classic era of the gold standard. The aims of this note are to (1) describe the mechanism of the international monetary system known as the gold standard during the time that it had the greatest influence on the global economy; (2) place the gold standard in context with other systems that preceded and followed it; and (3) dispel some enduring misconceptions. The Gold Standard in History The classic gold standard era commenced in the 1870s and ended with the suspension of the gold standard at the outbreak of World War I in 1914. Before this era, the major trading nations of the world relied on silver and gold coins as the basic money stock, supplemented by banknotes that were claims on silver and gold. The monetary standard of silver and gold was called bimetallism. Its chief advantage was that the two metals combined seemed to afford a sufficient supply of money with which to finance the growth of the developed economies. Its chief disadvantage was that it forced the major nations to declare a rate of exchange between the two metals (such as setting 16 ounces of silver equal in value to one ounce of gold), which created an arbitrage opportunity for speculators whenever the market prices of gold and silver diverged from the statutory exchange rate. . . .