Gold Standard: Unraveling the Glittering Tapestry of Global Finance

By Fouad Sabry

What is Gold Standard

An example of a monetary system that adheres to the gold standard is one in which the standard economic unit of account is determined by a predetermined amount of gold. From the 1870s until the early 1920s, and from the late 1920s until 1932, as well as from 1944 until 1971, when the United States unilaterally terminated convertibility of the United States dollar to gold, effectively ending the Bretton Woods system, the gold standard served as the foundation for the international monetary system. Notwithstanding this, a few of states possess significant gold reserves.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Gold standard

Chapter 2: Currency

Chapter 3: Euro

Chapter 4: Deflation

Chapter 5: Specie Payment Resumption Act

Chapter 6: Reserve currency

Chapter 7: Monetary policy

Chapter 8: Bimetallism

Chapter 9: Bretton Woods system

Chapter 10: Indian rupee

Chapter 11: European Monetary System

Chapter 12: History of the United States dollar

Chapter 13: Silver standard

Chapter 14: Nixon shock

Chapter 15: Barry Eichengreen

Chapter 16: Money

Chapter 17: Snake in the tunnel

Chapter 18: A Monetary History of the United States

Chapter 19: United States dollar

Chapter 20: Fiat money

Chapter 21: History of monetary policy in the United States

(II) Answering the public top questions about gold standard.

(III) Real world examples for the usage of gold standard in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of Gold Standard.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Feb 3, 2024

Book preview

Chapter 1: Gold standard

A gold standard is a monetary system in which the standard unit of account is determined by a set quantity of gold. From the 1870s to the early 1920s, and from the late 1920s to 1932, the gold standard underpinned the international monetary system.

In 1717, the United Kingdom adopted a gold standard by overvaluing gold by 15.2 times its weight in silver. It was uncommon among nations to utilize gold alongside clipped, underweight silver shillings, a situation that was only remedied by the acceptance of gold substitutes such as token silver coins and banknotes by the end of the 18th century.

The gold bullion standard is a system in which gold coins do not circulate but authorities, such as central banks, agree to swap circulating currency for gold bullion at a predetermined price. Keynes (1913) remarked that, beginning in the late 18th century to govern exchange between London and Edinburgh, this standard became the preferred mechanism of applying the gold standard internationally in the 1870s.

Restricting the free circulation of gold during the period of the Classical Gold Standard, from the 1870s to 1914, while assuring the exchangeability of vast quantities of legacy silver coins into gold at a set rate, was also required in governments that elected to apply the gold standard (rather than valuing publicly-held silver at its depreciated value). The term limping standard is sometimes applied to nations that hold considerable quantities of silver coin at par with gold, adding a further element of uncertainty to the currency's value relative to gold. French 5-franc coins, German 3-mark thalers, Dutch guilders, Indian rupees, and U.S. Morgan dollars were the most prevalent silver coins held at limping standard parity.

Countries may also implement a gold exchange standard in which the government guarantees a fixed exchange rate, not to a specific quantity of gold, but to the currency of another country that is also on a gold standard. By anchoring world currencies to the U.S. dollar, the only currency after World War II to be on the gold bullion standard, the Bretton Woods Agreement established this as the prevailing international standard from 1945 to 1971.

Asia Minor began using gold as currency circa 600 BCE

However, economic systems employing gold as the only currency and unit of account did not exist prior to the 18th century. Silver, not gold, was the true underpinning of domestic economies for millennia, serving as the basis for most money-of-account systems, wage and salary payments, and the majority of local retail trade. It was not possible for gold to serve as a currency and unit of account for daily transactions until the 19th century, when a number of obstacles were overcome, including the development of tools:

Gold's divisibility was impeded by its tiny size and scarcity; a ducat of 3.4 grams, the size of a dime, represented seven days' wages for the highest-paid laborers. In contrast, coins of silver and billon (low-grade silver) easily matched to daily labor expenditures and food purchases, making silver a superior unit of money and accounting standard. At the midpoint of the 15th century in England, the majority of highly compensated skilled workers earned 6d per day (six pence or 5.4 g of silver) while a whole sheep cost 12d. This rendered the ducat of 40d and the half-ducat of 20d useless for domestic commerce.

Before the nineteenth century, token coins of copper or billon that could be exchanged for silver or gold were nearly nonexistent, according to Sargent and Velde (1997). Small change was issued at a value close to its inherent worth and without provisions for its conversion into specie. In the pre-industrial age, tokens with little intrinsic worth were widely mistrusted, considered as a forerunner to currency devaluation, and were easily counterfeited. This rendered the gold standard impossible everywhere with token silver coins; Britain embraced the latter for the first time in the nineteenth century.

In the first half of the eighteenth century, banknotes were distrusted as currency due to France's disastrous banknote issuance in 1716 under economist John Law. The widespread acceptance of banknotes in Europe was contingent upon the development of financial institutions and the Napoleonic Wars of the early 19th century. Concerns about forgery also applied to banknotes.

From the denarius of the Roman Empire to the penny (denier) introduced by Charlemagne throughout Western Europe to the Spanish dollar and the German Reichsthaler and Conventionsthaler that survived well into the 19th century, the earliest European currency standards were based on the silver standard. Gold served as a medium for international trade and high-value transactions, but its value typically varied relative to silver currency. Throughout most of the 19th century, France was the most significant nation to maintain a bimetallic standard.

The English pound sterling introduced c. 800 CE was initially a silver standard unit worth 20 shillings or 240 silver pennies.

Initially, the latter held 1.35 g of pure silver, decreasing by 1601 to 0.46 grams (hence giving way to the shilling [12 pence] of 5.57 g fine silver).

The initial weight of the pound sterling was 324 g of fine silver, which decreased to 111.36 g by 1601.

From the late 17th century to the beginning of the 19th century, the problem of clipped, underweight silver pennies and shillings remained unaddressed. In 1717, the value of the gold guinea (consisting of 7.6885 g of fine gold) was set at 21 shillings, resulting in a gold-silver ratio 15.2 times greater than that of Continental Europe. De jure, the United Kingdom was on a bimetallic standard, with gold functioning as the cheaper and more dependable currency than clipped silver (full-weight silver coins did not circulate and went to Europe where 21 shillings fetched over a guinea in gold). Several causes contributed to the continuation of the British gold standard throughout the 19th century:

The 18th-century Brazilian Gold Rush supplied huge quantities of gold to Portugal and Britain, with Portuguese gold coins also becoming legal tender in Britain.

Continual trade imbalances with China (which sold to Europe but had little market for European goods) sapped silver from most European economies. Together with growing faith in banknotes issued by the Bank of England, it paved the way for gold and banknotes to replace silver as accepted currency.

Before the end of the 18th century, the acceptance of silver tokens and subsidiary coins as gold equivalents. Initially issued by the Bank of England and other private enterprises, the Great Recoinage of 1816 marked the beginning of the Royal Mint's permanent issuance of subsidiary coinage.

A proclamation by Queen Anne in 1704 introduced the British West Indies to the gold standard; but, due to Britain's mercantilist policy of hoarding gold and silver from its colonies for use at home, this did not result in widespread usage of gold currency and the gold standard. Prices were stated in gold pounds sterling, but were rarely paid in gold; the colonists' de facto daily medium of exchange and unit of account was the Spanish silver dollar. (Also detailed under the Trinidad and Tobago dollar's history.)

The British gold sovereign or £1 coin was the preeminent circulating gold coin during the classical gold standard period.

In the 19th century, Britain formally shifted from the bimetallic to the gold standard in numerous steps following the Napoleonic Wars:

The 21-shilling guinea was replaced by the 20-shilling gold sovereign, or £1 coin, containing 7.32238.0 g of pure gold

Commencing with the Great Recoinage of 1816, the permanent release of subsidiary, limited legal tender silver coins.

The 1819 Act for the Return of Cash Payments, which established 1823 as the date for the resumption of convertibility of Bank of England banknotes into gold sovereigns, and the 1823 Act for the Resumption of Cash