Classical analyses of the gold standard have generally overlooked the structural differences that existed both from an economic and a financial standpoint. The mechanisms of automatic rebalancing of balance-of-payments positions, supported by the “rules of the game” followed by central banks, were studied as if all the countries involved were at the same level of development and possessed banking systems of equal importance. François Perroux demonstrated in his theory of the dominant economy that a substantial part of economic analysis could be reformulated by taking into account the asymmetric effects that dominant units could exert over dominated ones. Traditional explanations of the gold standard failed to consider inequalities between countries arising from different levels of development, their status as creditors or debtors in international investment, the presence or absence of a central bank, and similar factors. Most authors agree that Great Britain was, until 1914, the banker of the world, and that the clearing of international credits and debts was carried out in London. Sterling, the national currency of the dominant economy of the nineteenth century, was widely accepted by most countries. The sterling area—an expression not used at the time—extended far beyond the limits of the British Empire. London’s money market benefited from a structure oriented toward international transactions and held a near-monopoly position.
Undeniably, the markets of Paris, Berlin, Amsterdam, and Zurich were highly active, but London remained without a competitor in the field of short-term financing of international trade. For this reason, London’s financial structure developed a form of organization and a division of labor unique in the world. Commercial banks dealt only with domestic transactions, while discount houses and acceptance houses financed international exchanges. Acceptance houses agreed among themselves to divide up the world market: Baring handled transactions with Russia and Argentina, while Rothschild financed operations with Spain and its colonies. Clients had no choice, but they benefited from fast and efficient techniques derived from long experience. It should also be added that the London gold market distributed the greater part of annual world production and that the major commodity markets were located in the City. This financial structure, resting on the world’s leading industrial country, was able to exert asymmetric effects through the attraction of international monetary reserves and the particular effectiveness of discount-rate policy.
Sterling: A World Currency
The international means of payment effectively used in the nineteenth century was not gold, but the bill of exchange drawn on the acceptance houses of Lombard Street and discounted by the discount houses. Although several international financial centers existed on the European continent, none possessed a financial structure capable of competing with London in short-term financing of world trade. Foreign countries, by contrast, had to strive to maintain the relationship between their currencies and sterling at a constant rate. Claims on London were as useful—and far more manageable—than gold reserves; moreover, unlike gold, they yielded interest. The City’s financial houses exercised an extraordinarily strong attraction over international monetary reserves. Before converting their surpluses into gold, central banks, official institutions, and commercial banks accumulated assets denominated in sterling. Sterling was the most effective means of holding international liquidity. This attraction exerted by London over monetary reserves was even stronger where national banking systems were weaker. The American banking system, which developed in an anarchic and fragmented manner and lacked a central bank until the founding of the Federal Reserve in 1913, provides a well-known example of dependence on London during the nineteenth century. At the beginning of the twentieth century, a National Monetary Commission was created in the United States to study the functioning of European banking systems and to propose a reform of the American system.
At that time, the United States had reached—and even surpassed—Great Britain in industrial production. Nevertheless, the weakness of its banking structure, and in particular the absence of an acceptance market, kept New York dependent on London. American importers and exporters made extensive use of the services of London’s acceptance and discount houses, holding their reserves in sterling in the City. One of the Commission’s reports stated in this regard that American importers depended heavily on London and had to pay a considerable annual tribute in the form of acceptance commissions. Bills of exchange were drawn in sterling, so that payment for American imports did not entail an outflow of dollars that could have financed the purchase of American products. This centralization, despite the relative importance of financial centers such as Paris, Berlin, and Zurich, limited speculative capital movements that would later contribute to the failure of the gold exchange standard in 1930. London’s preeminence was also due to the particular effectiveness of the discount-rate policy of the Bank of England. The authors of the Cunliffe Committee report and others attributed to all countries operating under the gold standard the virtues that were, in fact, specific to the British banking system.