For many years, the gold standard served the purpose of stabilizing individual economies. The international gold standard helped to facilitate global trade. A country that adopted a gold standard issued a currency backed by its gold reserves. Usually gold coins circulated in such a country, but this is not necessarily so: The medium of exchange could also be banknotes. The holder of such notes may then demand gold from the bank equivalent to the amount stated on the note. Since all holders of such notes would not exercise this right at the same time, the gold reserves required for maintaining the gold standard may be less than the amount of currency in circulation. A variant of the gold standard is the gold-exchange standard. Under this standard, gold is only exchanged among central banks, whereas the public cannot demand gold on presenting currency notes. Both standards imply a regime of fixed exchange rates.
The international gold standard was based on a free flow of gold. Economists praising the virtues of this standard argued that this free flow would automatically balance international trade. A country that attracted gold because of its positive balance of trade would experience inflationary pressures leading to a rise in prices, while countries losing gold would suffer from deflation and a fall in prices. In due course, the flow of trade and the flow of gold would be reversed, restoring an international equilibrium. This would not work, of course, if the receiving country “sterilized” gold by locking it up so as to prevent a rise in domestic prices. This was done by the United States in the 20th century with a devastating effect on the world economy, which is explained later in this entry.
The establishment of the international gold standard is attributed to Sir Isaac Newton who was master of the Royal Mint in 1717 when he fixed the value of the British currency in terms of a specific gold content. Newton did not make money by describing the law of gravity and depended on his salary as a mint master, but he did not regard this job as a sinecure. He applied his scientific mind to a study of all European currencies of his time. Newton's gold standard was a practical one maintained by the rules and regulations of the mint; it was not based on an act of Parliament. It greatly aided the expansion of the British economy in the 18th century but was upset by the Napoleonic wars when the British, in order to finance their war effort, adopted a policy of easy money. After the war, the Bullionist Controversy erupted in Britain, in which those who wished to restore the gold standard (Bullionists) were opposed by those who preferred the policy of easy money prevailing during the war. The Bullionists triumphed, and the resumption of the gold standard was based on act of Parliament of 1821. The most prominent advocates of the gold standard were economist David Ricardo and politician William Huskisson, who served as a minister of trade in the British cabinet and was convinced Britain derived benefits from the gold standard in the field of international trade. Under the British hegemony in this field, more and more European countries as well as the United States adopted the gold standard during the 19th century.
World War I dealt a shattering blow to the international gold standard. The standard was abandoned by most countries, but after the war, strenuous efforts were made to restore it so as to revive the golden age of prewar international trade. The London bankers were particularly eager to regain the dominant position that the city had enjoyed at that time. Actually the city had been able to support the free flow of gold as a result of the British position as exporter of capital earning huge amounts of interests on its investments abroad. The Bank of England more or less also served as a central bank for the United States. After the war this changed drastically, the United States became the biggest creditor and its new central bank, the Federal Reserve Board, which tried to ensure the stability of domestic prices, sterilized gold by hoarding it. Although this destroyed the foundation of the gold standard, the British nevertheless returned to it in 1925 at the prewar parity. Several other countries followed, with Japan being a latecomer in 1930. As a result of the Great Depression, the gold standard collapsed. Britain abandoned it in 1931, and Japan followed shortly thereafter. The United States with its gold treasures in Fort Knox would not have needed to abandon the gold standard, but it did so in 1933 so as to be able to reflate its currency to recover from the Depression. The regime of fixed exchange rates was replaced by floating currencies. The British pound floated at a very comfortable level as it was supported by the distress gold that flowed out of the periphery of the world economy.
Before the end of World War II, an attempt was made at the conference of Bretton Woods in 1944 to restore the world monetary system. The United States, because of its status as the world's creditor, made the U.S. dollar the international reserve currency. The new regime was a gold-exchange standard with a gold price fixed at US$35 per troy ounce (= 31.1 g). The United States was soon faced with the Triffin-Dilemma, which was first described by the economist Robert Triffin in 1959. As the United States had to provide more and more dollars to countries abroad, this demand would outgrow its gold reserves and finally lead to a loss of confidence in the dollar. This was exacerbated by the large expenditure on the Vietnam War. On August 15, 1971, U.S. President Richard Nixon was forced to close the gold window—that is, suspend the convertibility of the dollar into gold. This shock put an end to the international gold standard.
Bretton Woods Agreements/System, Currencies, Economic Crises, Ethnocentrism, Global Economic Issues, Global Governance and World Order, Trade
For many years, the gold standard served the purpose of stabilizing individual economies. The international gold standard helped to facilitate...
The gold standard was a fixed exchange rate system that operated as the primary monetary regime of the international economy from the late 19th...
Bloomfield Arthur I. , Monetary Policy under the International Gold Standard 1880-1914 , New York : Federal Reserve Bank of New...