Long considered definitively consigned to history, the recent difficulties of the international monetary system and the controversies they provoke demonstrate quite clearly that this is not the case. This should be welcomed, since it can only improve understanding of nineteenth-century monetary mechanisms. The theory of the gold standard as presented in most textbooks is more doctrinaire than analytical; in this field, dogmatic arrogance has too often replaced the spirit of inquiry. Robert Triffin remarked that “hundreds of works have discussed ad nauseam the problems of the gold standard” without devoting any attention to a statistical study of the evolution of monetary instruments. That second aspect is not the concern here. The sole ambition is to identify what the gold standard actually was in practice, in order to better assess the scope of contemporary debate. Monetary history unfolded according to a chronology divided into three phases: the nineteenth century witnessed the expansion and apogee of the gold standard, whose operation was disrupted by the First World War. The return to gold during the interwar period gave rise to the Gold Exchange Standard, whose collapse accompanied the crisis and depression of the 1930s. After a period of bilateral and multilateral agreements during the Second World War, the system gradually evolved toward a framework resembling the gold exchange standard, which today functions with difficulty and may constitute a permanent source of international imbalance. For this reason, it has been argued that a different system incorporating automatic stabilizers is required. A small number of authors see a pure and simple return to the gold standard as the solution. Such a proposal, however, requires a clear understanding of what the gold standard really was and why it did not survive the first global conflict.
Origins: Monometallism and Bimetallism
The origins of the gold standard must be sought in the history of metallic currencies. During the nineteenth century, three systems coexisted: silver monometallism in certain Asian countries, gold monometallism, and bimetallism based on both gold and silver. Silver monometallism gradually disappeared in the second half of the century as gold production increased rapidly after 1848. In the three centuries preceding the Californian gold rush of 1848–1849, around 4,000 tons of gold were extracted worldwide. Between 1848 and 1900, global gold stocks increased by approximately 13,000 tons. Countries that had adopted the silver standard were compelled to stabilize the price of gold, either by abandoning silver or by defining their currencies in relation to both precious metals. France followed the latter course with the creation of the germinal franc. The British law of 1816 also took silver into account, although in practice England can be considered to have adopted the gold standard from that date onward.
Gold Monometallism
England formally adopted the gold standard in 1816, using the gold definition of sterling established in 1717 by Isaac Newton when he was Master of the Mint. The value of one ounce of gold of 11/12 fineness was set at £3 17s 10½d. A gold coin weighing 7.988 grams of 11/12 fine gold—the sovereign—represented one pound sterling. Gold enjoyed the right of free coinage, and only gold coins had unlimited legal tender power. Nevertheless, the 1816 law also created a silver coin, the shilling, weighing 5.23 grams of fine silver. Since one pound equaled twenty shillings, the relationship between the two metals was implicitly established. The silver content of one pound sterling amounted to 104.60 grams, while the fine gold content was 7.32 grams. Thus, 104.60 grams of fine silver were legally equivalent to 7.32 grams of fine gold, implying a legal gold–silver ratio of 14.29 to 1. It is well known that the market ratio between the two metals gradually changed and reached around 30 to 1 by the end of the nineteenth century, despite the unchanged legal ratio. Silver coins nevertheless continued to function as subsidiary coinage within a gold-based system. Alongside silver coins, whose minting was limited, gold coins and banknotes convertible into gold circulated.
Following the controversies between the currency school and the banking school, the Bank Act of 1844 tightly linked the issuance of banknotes to gold reserves. Apart from a small fiduciary circulation backed by government funds, notes were required to be fully covered by the metallic reserves of the Bank of England. These reserves could consist of gold and silver bullion, but the value of silver was not allowed to exceed one fifth of the total. It should be noted that the Bank of England ceased to hold silver bullion in its reserves after 1861. This strict emission system reflected the desire to guarantee full convertibility of banknotes into gold and to avoid recourse to forced currency during periods of crisis.
At the beginning of the century, during the bullionist controversy over rising bullion prices, David Ricardo defended a system of convertibility directly based on gold reserves. Considering gold as “the principal measure of value,” he relied on the quantity theory to argue that excessive banknote issuance had led to rising prices. Ricardo nonetheless proposed convertibility into bullion rather than coin, a Gold Bullion Standard that would only be adopted after the First World War. In his essay The High Price of Bullion (1811), he clearly set out his views, showing that he attached limited importance to the circulation of gold coin. The essential objective was to economize on gold in order to ensure the proper functioning of the gold standard, which depended primarily on the free convertibility of banknotes into bullion rather than into fractional coin for domestic transactions. In other words, Ricardo understood that convertibility implied the use of gold in international transactions, and it was for this purpose that central bank reserves had to be defended. The Bank Act represented a posthumous victory for Ricardo’s position on note issuance, although convertibility was not restricted to bullion purchases, particularly given London’s role as the effective coordinator of the gold standard and the difficulties inherent in the coexistence of gold and silver in bimetallic countries.
The gold standard was adopted by Portugal in 1854, by Germany between 1871 and 1873, by the Scandinavian countries between 1873 and 1875, by Finland and Serbia in 1878, by Argentina in 1881, by Egypt in 1885, by Romania in 1890, by Austria-Hungary in 1892, by Russia, Bulgaria, Japan, and Chile in 1897, by the United States in 1900, by the Netherlands in 1901, by Mexico in 1904, among others.