The international monetary system is often criticized for relying more on the use of currencies (dollars and pounds) than on gold to settle payments. France even announced, in early February 1965, that it would no longer accept foreign currencies in payment of net surpluses. In a lecture delivered at the Faculty of Law in Paris on February 11, 1965, the then French Minister of Finance, Giscard d’Estaing, stated that the major nations should make a solemn declaration committing themselves henceforth to settle their deficits through direct payment in gold rather than through additional reserve money.
Evidently, this could not be done, since it would amount to eliminating three quarters of the international liquidity currently available. Moreover, the gold standard never consisted, among other things, in the exclusive use of the yellow metal as a means of payment. The financing needs of international trade, which expanded with industrial development, were met through short-term bank credit and long-term capital movements long before the gold exchange standard was officially discussed. It was not the Genoa Conference of 1922 that “dangerously” innovated by distinguishing between key currencies under a gold standard regime and peripheral currencies under a gold exchange standard regime. The accumulation of foreign currencies as a means of international liquidity is a very old phenomenon that advocates of a return to gold prefer to ignore. According to traditional analysis, a balance-of-payments disequilibrium should immediately generate gold movements that would trigger all the adjustment mechanisms previously described. Yet a number of serious studies on France’s international accounts (1850–1913) by H. D. White; on Germany and Great Britain by C. Bresciani Turroni; and on U.S. foreign payments by F. W. Taussig have not confirmed the classical theory. It is worth quoting the passage in which Taussig, himself a supporter of the classical view, expresses his surprise and doubts:
“Actual movements of goods appear to have adjusted to variations in the balance of payments with surprising accuracy and speed… Yet none of the disturbances envisaged by theoretical analysis can be observed… The transactions recorded between different countries indicate surprisingly weak transfers of the only currency that moves from one country to another, namely gold. It is goods that move and seem to do so immediately… The intermediate stage one might expect—gold movements and price changes—is difficult to detect and is certainly extraordinarily brief.”
Since gold moved so little, this implies the existence of other means of payment; and in searching for them, we find that the nineteenth-century gold standard was, in effect, a kind of gold exchange standard. Recent work by Arthur Bloomfield clearly demonstrates the importance of foreign exchange reserves held by central banks at the end of the nineteenth century, alongside gold reserves. At that time, world gold reserves amounted to 4.9 billion dollars. The earliest date for which Bloomfield provides an estimate of foreign exchange assets is 1880, when the total volume was 60 million dollars. Over the next twenty years, this figure more than doubled, reaching 130 million dollars by 1899. The essential question is which currencies were held as reserves by central banks and monetary authorities. It is known that the Russian bank held assets in London, Berlin, Paris, Vienna, Hamburg, and Amsterdam, but statistical information does not allow an estimate of the volumes held in each location. Without doubt, a large proportion of total foreign exchange assets consisted of sterling bills of exchange, deposits in London banks, and other short-term sterling assets.
Russia was undoubtedly one of the few countries that held part of its monetary reserves in foreign currencies outside London. On January 1, 1914, Russia held 594 million rubles in foreign exchange (306 million dollars), of which 431 million represented assets against France, 103 million against Germany, and 46 million against Great Britain. World reserves of gold and foreign exchange held by central banks and monetary authorities are summarized in Table III, which gives an idea of the relative importance of foreign exchange reserves compared with gold reserves between 1880 and 1913. These figures, drawn from Bloomfield’s studies, are only approximate, but their evolution clearly shows that the role of foreign currencies increased significantly at the end of the nineteenth century. Conditions governing banknote issuance varied widely by country, but what is essential is the acceptance of national currencies as reserve assets and means of payment in international transactions. Despite the lack of complete statistical data, there is no doubt that the privileged currency was sterling. Not only did the banking structure of London support this conclusion, but it is also telling that Great Britain was the only major country without foreign exchange reserves. At the same time, the gold reserves of the Bank of England were extraordinarily small, yet its discount rate policy was particularly effective and prevented any prolonged external imbalance. By the final decades of the nineteenth century, the gold standard had become not merely a gold exchange standard, but a true sterling exchange standard.