GOLD STANDARD

GOLD STANDARD. The gold standard is a monetary system in which gold is the standard or in which the unit of value—be it the dollar, the pound, franc, or some other unit in which prices and wages are customarily expressed and debts are usually contracted—consists of the value of a fixed quantity of gold in a free gold market.

U.S. experience with the gold standard began in the 1870s. From 1792 until the Civil War, the United States, with a few lapses during brief periods of suspended specie payments, was on a bimetallic standard. This broke down in the early days of the Civil War, and from 30 December 1861 to 2 January 1879, the country was on a depreciated paper money standard. The currency act of 1873 dropped the silver dollar from the list of legal coinage but continued the free and unlimited coinage of gold and declared the gold dollar to be the unit of value. There was a free market in the United States for gold, and gold could be exported and imported without restriction. Nonetheless, for six more years the United States continued on a de facto greenback standard. In accordance with the provisions of the Resumption Act of 1875, paper dollars became officially redeemable in gold on 2 January 1879.

Under the gold standard as it then operated, the unit of value was the gold dollar, which contained 23.22 grains of pure gold. Under free coinage, therefore, anyone could take pure gold bullion in any quantity to an American mint and have it minted into gold coins, receiving $20.67 (less certain petty charges for assaying and refining) for each ounce.

The Gold Standard Act of 1900 made legally definitive a gold-standard system that had existed de facto since 1879. This act declared that the gold dollar "shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard." That meant that the value of every dollar of paper money and of silver, nickel, and copper coins and of every dollar payable by bank check was equal to the value of a gold dollar—namely, equal to the value of 23.22 grains of pure gold coined into money. Thenceforth global trends would contribute to domestic cycles of inflation and deflation. If the supply of gold thrown on the world's markets relative to the demand increased, gold depreciated and commodity prices increased in the United States and in all other gold-standard countries. If the world's demand for gold increased more rapidly than the supply of gold, gold appreciated and commodity prices in all gold-standard countries declined.

Until the Great Depression there was general agreement among economists that neither deflation nor inflation is desirable and that a stable unit of value is best. Since then, some economists have held that stable prices can be achieved only at the expense of some unemployment and that a mild inflation is preferable to such unemployment. While gold as a monetary standard during the half-century 1879–1933 was far from stable in value, it was more stable than silver, the only competing monetary metal, and its historical record was much better than that of paper money. Furthermore, its principal instability was usually felt during great wars or shortly thereafter, and at such times all other monetary standards were highly unstable.

During the late nineteenth century, the major nations of the world moved toward the more dependable gold coin standard; between 1873 and 1912 some forty nations used it. World War I swept all of them off it whether they were in the war or not. At the Genoa Conference in 1922, the major nations resolved to return to the gold standard as soon as possible (a few had already). Most major nations did so within a few years; more than forty had done so by 1931.

But not many could afford a gold coin standard. Instead, they used the gold bullion standard (the smallest "coin" was a gold ingot worth about eight thousand dollars) or the even more economical gold exchange standard, first invented in the 1870s for use in colonial dependencies. In the latter case the country would not re-deem in its own gold coin or bullion but only in drafts on the central bank of some country on the gold coin or gold bullion standard with which its treasury "banked." As operated in the 1920s, this parasitic gold standard, preferentially dependent on the central banks of Great Britain, France, and the United States, allowed credit expansion on the same reserves by two countries.

It was a hazardous system, for if the principal nation's central bank was in trouble, so were all the depositor nations. In 1931 the gold standards of Austria, Germany, and Great Britain successively collapsed, the last dragging down several nations on the gold exchange standard with it. This was the beginning of the end of the gold standard in modern times. Many of the British, notably economist J. M. Keynes, alleged that both the decline in Great Britain's foreign trade and its labor difficulties in the late 1920s had been caused by the inflexibility of the gold standard, although it had served the nation well for the previous two centuries. Others argued that Britain's problems were traceable to its refusal to devalue the depreciated pound after the war or to obsolescence in major industries. In any event, Britain showed no strong desire to return to the gold standard.

Meanwhile, in the United States the gold coin standard continued in full operation from 1879 until March 1933 except for a brief departure during the World War I embargo on gold exports. At first the panic of 1929, which ushered in the long and severe depression of the 1930s, seemed not to threaten the gold standard. Britain's departure from the gold standard in 1931 shocked Americans, and in the 1932 presidential campaign, the Democratic candidate, Franklin D. Roosevelt, was known to be influenced by those who wanted the United States to follow Britain's example. A growing number of bank failures in late 1932 severely shook public confidence in the economy, but it was not until February 1933 that a frightened public began to hoard gold. On 6 March 1933, soon after he took office, President Roosevelt declared a nationwide bank moratorium for four days to stop heavy withdrawals and forbade banks to pay out gold or to export it. On 5 April the president ordered all gold coins and gold certificates in hoards of more than a hundred dollars turned in for other money. The government took in $300 million of gold coin and $470 million of gold certificates by 10 May.

Suspension of specie payments was still regarded as temporary; dollar exchange was only a trifle below par. But the president had been listening to the advice of inflationists, and it is likely that the antihoarding order was part of a carefully laid plan. Suddenly, on 20 April, he imposed a permanent embargo on gold exports, justifying the step with the specious argument that there was not enough gold to pay all the holders of currency and of public and private debts in the gold these obligations promised. There never had been, nor was there expected to be. Dollar exchange rates fell sharply. By the Thomas Amendment to the Agricultural Adjustment Act of 12 May 1933, Congress gave Roosevelt power to reduce the gold content of the dollar as much as 50 percent. A joint resolution of Congress on 5 June abrogated the gold clauses to be found in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In four cases the Supreme Court later upheld this abrogation.

During the autumn of 1933, the Treasury bid up the price of gold under the Gold Purchase Plan and finally set it at $35 an ounce under the Gold Reserve Act of 30 January 1934. Most of the resulting profit was subsequently used as a stabilization fund and for the retirement of national bank notes. The United States was now back on a gold standard (the free gold market was in London). But the standard was of a completely new kind, and it came to be called a "qualified gold-bullion standard." It was at best a weak gold standard, having only external, not internal, convertibility. Foreign central banks and treasuries might demand and acquire gold coin or bullion when the exchange rate was at the gold export point, but no person might obtain gold for his money, coin, or bank deposits. After France left gold as a standard in 1936, the qualified gold-bullion standard was the only gold standard left in a world of managed currencies.

Although better than none at all, the new standard was not very satisfactory. The thirty-five-dollar-an-ounce price greatly overvalued gold, stimulating gold mining all over the world and causing gold to pour into the United States. The "golden avalanche" aroused considerable criticism and created many problems. It gave banks excess reserves and placed their lending policies beyond the control of the Federal Reserve System. At the same time citizens were not permitted to draw out gold to show their distrust of the new system or for any other reason. As for its stated intent to raise the price of gold and end the Depression, the arrangement did neither. Wholesale prices rose only 13 percent between 1933 and 1937, and it took the inflation of World War II to push them up to the hoped-for 69 percent. Except for a brief recovery in 1937, the Depression lasted throughout the decade of the 1930s.

The appearance of Keynes's General Theory of Employment, Interest and Money in 1936 and his influence on the policies of the Roosevelt administration caused a revolution in economic thinking. The new economics deplored oversaving and the evils of deflation and made controlling the business cycle to achieve full employment the major goal of public policy. It advocated a more managed economy. In contrast, the classical economists had stressed capital accumulation as a key to prosperity, deplored the evils of inflation, and relied on the forces of competition to provide a self-adjusting, relatively unmanaged economy. The need to do something about the Great Depression, World War II, the Korean War, and the Cold War all served to strengthen the hands of those who wanted a strong central government and disliked the trammels of a domestically convertible gold-coin standard. The rising generation of economists and politicians held such a view. After 1940 the Republican platform ceased to advocate a return to domestic convertibility in gold. Labor leaders, formerly defenders of a stable dollar when wages clearly lagged behind prices, began to feel that a little inflation helped them. Some economists and politicians frankly urged an annual depreciation of the dollar by 2, 3, or 5 percent, allegedly to prevent depressions and to promote economic growth; at a depreciation rate of 5 percent a year, the dollar would lose half its buying power in thirteen years (as in 1939–1952), and at a rate of 2 percent a year, in thirty-four years. Such attitudes reflected a shift in economic priorities because capital seemed more plentiful than before and thus required less encouragement and protection.

There remained, however, a substantial segment of society that feared creeping inflation and advocated a return to the domestically convertible gold-coin standard. Scarcely a year passed without the introduction in Congress of at least one such gold-standard bill. These bills rarely emerged from committee, although in 1954 the Senate held extensive hearings on the Bridges-Reece bill, which was killed by administration opposition.

After World War II a new international institution complemented the gold standard of the United States. The International Monetary Fund (IMF)—agreed to at a United Nations monetary and financial conference held at Bretton Woods, New Hampshire, from 1 July to 22 July 1944 by delegates from forty-four nations—went into effect in 1947. Each member nation was assigned a quota of gold and of its own currency to pay to the IMF and might, over a period of years, borrow up to double its quota from the IMF. The purpose of the IMF was to provide stability among national currencies, all valued in gold, and at the same time to give devastated or debt-ridden nations the credit to reorganize their economies. Depending on the policy a nation adopted, losing reserves could produce either a chronic inflation or deflation, unemployment, and stagnation. Admittedly, under the IMF a nation might devalue its currency more easily than before. But a greater hazard lay in the fact that many nations kept part of their central bank reserves in dollars, which, being redeemable in gold, were regarded as being as good as gold.

For about a decade dollars were much sought after. But as almost annual U.S. deficits produced a growing supply of dollars and increasing short-term liabilities in foreign banks, general concern mounted. Some of these dollars were the reserve base on which foreign nations expanded their own credit. The world had again, but on a grander scale, the equivalent of the parasitic gold-exchange standard it had had in the 1920s. Foreign central bankers repeatedly told U.S. Treasury officials that the dollar's being a reserve currency imposed a heavy responsibility on the United States; they complained that by running deficits and increasing its money supply, the United States was enlarging its reserves and, in effect, "exporting" U.S. inflation. But Asian wars, foreign aid, welfare, and space programs produced deficits and rising prices year after year. At the same time, American industries invested heavily in Common Market nations to get behind their tariff walls and, in doing so, transmitted more dollars to those nations.

Possessing more dollars than they wanted and preferring gold, some nations—France in particular—demanded gold for dollars. American gold reserves fell from $23 billion in December 1947 to $18 billion in 1960, and anxiety grew. When gold buying on the London gold market pushed the price of gold to forty dollars an ounce in October 1960, the leading central banks took steps to allay the anxiety, quietly feeding enough of their own gold into the London market to lower the price to the normal thirty-five dollars and keep it there. When Germany and the Netherlands upvalued their currencies on 4 and 6 March 1961, respectively, their actions had somewhat the same relaxing effect for the United States as a devaluation of the dollar would have had. On 20 July 1962 President John Kennedy forbade Americans even to own gold coins abroad after 1 January 1963. But federal deficits continued, short-term liabilities abroad reaching $28.8 billion by 31 December 1964, and gold reserves were falling to $15.5 billion.

Repeatedly the Treasury took steps to discourage foreign creditors from exercising their right to demand gold for dollars. The banks felt it wise to cooperate with the Americans in saving the dollar, everyone's reserve currency. By late 1967, American gold reserves were less than $12 billion. In October 1969 Germany upvalued the mark again, and American gold reserves were officially reported at $10.4 billion. The patience of foreign creditors was wearing thin. During the first half of 1971, U.S. short-term liabilities abroad shot up from $41 billion to $53 billion, and the demand for gold rose. On 15 August 1971 President Richard M. Nixon announced that the U.S. Treasury would no longer redeem dollars in gold for any foreign treasury or central bank. This action took the nation off the gold standard beyond any lingering doubt and shattered the dollar as a reliable reserve currency. At a gathering of financial leaders of ten industrial nations at the Smithsonian Institution in Washington, D.C., on 17 to 18 December 1971, the dollar was devalued by 7.89 percent in the conversion of foreign currencies to dollars, with some exceptions. In 1972 gold hit seventy dollars an ounce on London's free market for gold, and the United States had its worst mercantile trade deficit in history.

In early 1973 another run on the dollar began. The Treasury announced a 10 percent devaluation of the dollar on 12 February, calling it "a means toward easing the world crisis" and alleging that trade concessions to the United States and greater freedom of capital movements would follow. The new official price of gold was set at $42.22, but on the London market gold soon reached $95 and went to $128.50 in Paris in mid-May. A third devaluation seemed possible but was avoided, at least outwardly. The nine Common Market nations all "floated" their currencies, and Germany and Japan announced they would no longer support the dollar. By midsummer the dollar had drifted another 9 percent downward in value. The U.S. Treasury refused to discuss any plans for a return to gold convertibility. Nevertheless the United States and all other nations held on to their gold reserves. Several European nations, notably France and Germany, were willing to return to a gold basis.

In the 1970s opponents of the gold standard insisted that the monetary gold in the world was insufficient to serve both as a reserve and as a basis for settling large balances between nations, given the rapid expansion of world trade. Supporters of the gold standard distrusted inconvertible paper money because of a strong tendency by governments, when unrestrained by the necessity to redeem paper money in gold on demand, to increase the money supply too fast and thus to cause a rise in price levels. Whereas opponents of the gold standard alleged there was insufficient monetary gold to carry on international trade—they spoke of there being insufficient "liquidity"—supporters stressed that national reserves did not have to be large for this purpose, since nations settled only their net balances in gold and not continually in the same direction.

A period of severe inflation followed the Nixon administration's decision to abandon the gold standard. Nevertheless, despite the economic turmoil of the 1970s, the United States did not return to the gold standard, choosing instead to allow the international currency markets to determine its value. In 1976 the International Monetary Fund established a permanent system of floating exchange rates, a development that made the gold standard obsolete and one that allowed the free market to determine the value of various international currencies. Consequently, as inflation weakened the American dollar, the German Mark and Japanese Yen emerged as major rivals to the dollar in international currency markets.

In the 1990s the American dollar stabilized, and, by the end of the decade, it had regained a commanding position in international currency markets. The robust global economic growth of the 1980s and 1990s appeared to vindicate further the decision to vacate the gold standard. In 2002 the European Union introduced into circulation the Euro, a single currency that replaced the national currencies of nearly a dozen European nations, including major economic powers such as Germany, France, and Italy. The Euro quickly emerged as a highly popular currency in international bond markets, second only to the dollar. Although the long-term direction of international currency markets remains unclear, it seems certain that neither the United States nor Europe will ever return to the gold standard.

BIBLIOGRAPHY

Chandler, Lester Vernon. American Monetary Policy, 1928–1941. New York: Harper & Row, 1971.

De Cecco, Marcello. The International Gold Standard: Money and Empire. New York: St. Martin's Press, 1984.

Eichengreen, Barry J. Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. New York: Oxford University Press, 1992.

Gallarotti, Giulio M. The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880–1914. New York: Oxford University Press, 1995.

Kemmerer, Edwin Walter. Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future. New York: McGraw-Hill, 1944.

Mehrling, Perry G. The Money Interest and the Public Interest: American Monetary Thought, 1920–1970. Cambridge, Mass.: Harvard University Press, 1997.

Ritter, Gretchen. Goldbugs and Greenbacks: The Antimonopoly-Tradition and the Politics of Finance, 1865–1896. New York: Cambridge University Press, 1997.

Schwartz, Anna, and Michael D. Bordo, eds. A Retrospective on the Classical Gold Standard, 1821–1931. National Bureau of Economic Research. Chicago: University of Chicago Press, 1984.

Donald L. Kemmerer / a. r.

See also Banking: Banking Crisis of 1933 ; Bimetallism ; Debt, Public ; Free Silver ; Gold Bugs ; Gold Purchase Plan ; Gold Reserve Act ; Great Depression ; Inflation ; International Monetary Fund ; Keynesianism ; Money ; Specie Payments, Suspension and Resumption of ; Treasury, Department of the .

GOLD STANDARD (ISSUE)

The gold standard was first put into operation in Great Britain in 1821, but the full international gold standard lasted from about 1870 until World War I (1914–18). Great Britain re-established its gold standard in 1928.

During the colonial period, American commerce was hindered by the absence of an adequate, standard medium of exchange. It was impossible to establish a gold or silver currency because colonists did not have natural supplies of these metals and had to rely on foreign trade to acquire them. Some Spanish and Portuguese coins made their way into the English colonies. These coins were exchanged for goods and paper money, but the value of the coins varied because the colonies competed with one another and overvalued the specie.

After Independence, the Constitution provided for the establishment of a national currency. The Mint Act of 1792 adopted the decimal system as the medium of reckoning, established the dollar as the basic unit of value, and created a bimetallic currency with a mint ratio of 15 to one. Authorized gold coins were the $10 eagle, the $5 half-eagle, and the $2.50 quarter-eagle. Silver coins were the dollar, half-dollar, and quarter. Copper coins were the penny and the halfpenny. This bimetal system would last for the remainder of the nineteenth century until the passing of the Gold Standard Act of 1900.

The bimetallic coin production system met with many early difficulties. From roughly 1792 until 1834 the market ratio of silver to gold rose above the fixed mint ratio. Silver's resulting domination drove gold out of circulation. But merchants found that it was possible to gain a silver premium by exchanging U.S. silver dollars for slightly heavier Spanish silver dollars. This in turn caused a drain on U.S. currency. Accordingly the United States discontinued the minting of the silver dollar from 1806 to 1840 and the half-dollar became the principal coin in use. The resulting shortages of U.S. specie compelled the United States to grant legal tender status for foreign coins. This status lasted a short time since it was assumed that U.S. currency would soon replace the foreign coins.

The Coinage Act of 1834 was intended to bring gold back into circulation. With the mint ratio adjusted to 15.988 to one, silver was undervalued at the mint and forced out of circulation. Discoveries of gold in California and Australia further debased gold and increased the supply of gold coins. In an effort to prevent silver from disappearing altogether, Congress passed the Subsidiary Coinage Act in 1853 which reduced the weight of subsidiary silver coins. But despite these attempts at keeping the dual system alive, opposition and opinion against bimetallism mounted.

During the 1870s demand for the free coinage of silver increased, especially among Western farmers who had been adversely affected by falling prices and the "demonetization" of silver. After the American Civil War (1861–1865), the worldwide output of gold slowly diminished, silver production greatly increased, and the value of silver—relative to gold—declined. In 1873 the government removed the silver dollar from the list of coins to be minted. A year later the commercial ratio of silver to gold rose to over 16 to one, and many Western farmers (then a growing political force) felt that it would have been profitable to coin silver dollars at the mint ratio. Forming a Populist agenda, farmers called the "demonetization" act the "crime of 73" and pushed for the coinage of free silver to push prices up. With the passing of the Bland-Allison Act, the government agreed to purchase between $2 and $4 million worth of silver to be coined into silver dollars.

During the 12 years the Bland-Allison Act was enforced, 378 million silver dollars were coined. Pushed by Populist demands, the Republicans agreed to pass the Sherman Silver Purchase Act in 1890 which required the United States Treasury to buy 4.5 million ounces of silver monthly. During the three-year period of the Purchase Act's operation, the government bought nearly $156 million of silver. This endangered the gold standard, and eventually gold was forced out of circulation. During the Panic of 1893, President Grover Cleveland (1885–89) and (1893–97) called a special session of Congress during which the Sherman Silver Purchase Act was repealed. Between 1894 and 1896, the government maintained the gold standard through the purchase of over $200 million in gold, paid for with four and five percent bonds.

While the agitation surrounding silver coinage continued for a while, it never again became so important an issue as in the election of 1896. During the presidential election of 1896, Democratic candidate William Jennings Bryan (1860–1925) was heavily influenced by the Populist demand to inflate silver's value in order to raise prices for their crops. Bryan campaigned for the free coinage of silver at the ratio of 16 to one. But Bryan's opposition, Republican candidate William McKinley (1897–1901), called for the maintenance of the gold standard. After a heated contest between the two candidates, William McKinley was elected president. Reasons for McKinley's victory were twofold: conditions for farmers began to improve in 1896, and voters distrusted Bryan's financial policies.

When the U.S. Congress passed the Gold Standard Act in 1900, many of the monetary questions that had plagued the U.S. economy for over a century appeared to be settled. The Gold Standard Act established a full gold standard, and provided the free coinage of gold and full convertibility of currency into gold coin. But the Great Depression caused the collapse of the gold standard and reopened the issue of a currency standard for the United States. In response Congress passed the Gold Reserve Act in 1934 which put the country on a modified gold standard and stipulated that gold could not be used as a medium of domestic exchange. This legislation paved the way for the end of a gold-based monetary system altogether in domestic exchange. Under the Gold Reserve Act, the dollar was legally defined as having a certain, fixed value in gold. Thus, although gold was still considered to be important for the preservation of confidence in the dollar, its connection with the actual use of money remained vague.

After World War II (1939–1945), most exchange rates were pegged either to gold or to the dollar. In 1958 another type of gold standard was established in which major European countries had free convertibility of their currencies into gold and dollars for international payments. But there was no restoration of a pure international gold standard as such and many wanted a more clearly defined relationship between gold and the dollar. Later attempts were made to make the dollar less dependent upon gold for its value. In 1971 President Richard M. Nixon (1969–1974) ended the convertibility of the dollar into gold. Following Nixon's action, practically all U.S. currency, paper or coin, was essentially fiat money, and gold became no more than a commodity traded on international markets.

A gold standard had both advantages and disadvantages. On one hand, it provided a fixed pattern of exchange rates for international trade. Under normal circumstances, the value of gold did not fluctuate greatly over short periods because of the relative stability of demand and supply. Over longer periods however, the effects of cumulative production in relation to immediate demand resulted in an unstable value, which caused difficulty in gold management in relation to price stability.

Many economists believed that the disadvantages of a gold standard far outweighed the advantages. Because of the limited supply of gold, a gold standard inherently limited flexibility in the money supply; thus, it hampered the growth and expansion of the economy. A gold standard also limited the power to create money, which in turn caused inflation. Moreover, since gold was a commodity, its value increased or decreased according to supply and demand for it which caused destabilization and consumer uncertainty. And finally, the gold supply benefited some countries at the expense of others. Some countries controlled large supplies of gold and affected the operation of other economies, either through natural supply or acquisition of gold.

See also: William Jennings Bryan, Cross of Gold Speech, Free Silver, Gold Resumption Act, Gold Standard Act, Sherman Silver Purchase Act

FURTHER READING

Friedman, Milton, and Anna Schwartz. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press, 1963.

James, John A. "The Development of the National Money Market, 1893–1911." Journal of Economic History. 36 (1976): 878–97.

——. Money and Capital Markets in Postbellum America. Princeton: Princeton University Press, 1978.

Mitchell, Wesley C. Gold, Prices, and Wage under the Greenback Standard. Berkeley: University of California Press, 1908.

Shannon, F. A. The Farmer's Last Frontier: Agriculture 1860–1897. New York: Farar, Straus, and Young, 1945.

Gold Standard

BEFORE WORLD WAR I

THE BRETTON WOODS AGREEMENT

BIBLIOGRAPHY

Gold has been a medium of exchange for a very long time. Although until the late nineteenth century gold had to compete with silver as the preferred standard unit of account in international financial transactions, gold has been used to measure wealth since antiquity. In the sixteenth and seventeenth centuries, following the discovery of rich gold mines in the Americas, the prevailing economic theory, mercantilism, recommended the pursuit of restrictive trade policies designed to discourage the importation of foreign goods and to encourage the exportation of domestic goods so as to increase the stock of precious metals, and of gold in particular, in the treasuries of the most important European kingdoms. But the gold standard refers to a more recent and specific phase in monetary history—a phase that is now past, and probably irrevocably so. Most contemporary economics textbooks pay only scant attention to it (Kimball 2005). A few economists, however, still advocate a return to the practices that defined the gold standard for reasons that are discussed further below.

Under the gold standard, as it began to take shape in the 1870s, currencies were backed by gold exclusively. Within a country, paper money could be redeemed for a guaranteed amount of gold and, internationally, fixed exchange rates determined the quantities of gold that central banks could use to clear international balance of payment accounts. In practice, however, this strict principle allowed for a limited degree of flexibility allowing the central banks of the countries that adhered to the gold standard regime to engage in a variety of manipulations (e.g., convertibility was severely limited in many of the less powerful countries). Great Britain was almost continually on a gold standard from the 1750s until 1913, with the exception of about two decades (1798 to 1821) when the Napoleonic wars and their aftermath forced the Bank of England to issue nonconvertible paper currency. Most of the other powers, however, including the United States, based their currencies on both gold and silver until the 1870s. (In fact, the word for silver in French also means money.) But by the 1870s because the price of silver had become too unstable, most European powers and the United States chose to hold only gold in their bank reserves, and to officially establish the convertibility of their currencies in gold only. By the 1890s a process of gold standardization had occurred: Most countries were by then part of an international financial regime based on a fixed exchange rate for gold.

The transition to the gold standard was not entirely smooth. There were political interests that opposed it. In the United States, for example, farmers in the Midwest continued to support a return to bimetallism for about two decades after the United States (unofficially) adopted the gold standard in 1879, in part because they felt that the rules of the gold standard made it more difficult for them to obtain credit and made them more dependent on what they perceived as the whims of the “eastern banks,” impersonated as the wicked Witch of the East in L. Frank Baum’s fairy tale The Wizard of Oz. In fact, the United States did not legally switch to the gold standard until 1900 (Littlefield 1964).

BEFORE WORLD WAR I

The pre–World War I gold standard worked very efficiently as a means to maintain price stability. Gold, and to a lesser extent British pounds, flowed between countries to compensate for trade surpluses and deficits. In theory, the system functioned automatically: If the real exchange rate for a given currency was above the nominal exchange rate in gold, exports suffered and imports increased, creating a balance of payments deficit; external creditors asked to be paid in gold and the resulting outflow of gold had the effect of lowering domestic prices, thereby stimulating exports and discouraging imports and eventually bringing down the real exchange rate nearer to, or even below, the nominal rate, and the pendulum swung in the other direction. The monetary authorities were expected to take appropriate measures to facilitate this process: raising the bank rate, which, in turn, led to rising interest rates, in order to decrease investments and reinforce the deflationary effect of an outflow of gold, while at the same time ensuring that the outflow of gold would not continue indefinitely, or lowering it to reinforce the inflationary effects of an inflow of gold, but also thereby preparing the ground for a reduction in that inflow. That these measures often had a deflationary effect was of little concern at a time when governments were not held responsible for unemployment. The effectiveness of the system was reinforced by the fact that investors, often anticipating the measures that monetary authorities were about to adopt, moved their funds from country to country, thereby bringing about the equilibrium that these measures would have reestablished and diminishing at the same time the need for such measures.

Already in the years immediately preceding World War I there were signs of tension in the system. The outbreak of the war led to its collapse. The interwar years were much more troubled as far as the international monetary system is concerned. Although most nations that had suspended convertibility into gold reinstituted it in the 1920s, it never functioned as well as it had before the war and by 1937 it had been abandoned by all countries. (Germany had done so in 1931, Britain in 1933, and the United States in 1933; France and Japan held on until 1936.) There is no complete agreement on the question of whether the demise of the gold standard was brought about by the Great Depression or whether the gold standard was itself a major cause of the severity of the depression. The latter thesis points to the fact that the United States and France, two countries with trade surpluses, together held more than half of the gold while also pursuing deflationary policies, which led to a contraction of the money supplies in much of the rest of the world that made it impossible to initiate expansionary programs in timely fashion to deal with the onset of the depression (Bordo 1993; Eichengreen 1992). But what is certain is that at the end of World War II, the gold standard was widely regarded as having been a failure.

THE BRETTON WOODS AGREEMENT

The participants in the 1944 conference held in Bretton Woods, New Hampshire, were seeking to establish an international system that would retain the stability and predictability of the pre–World War I gold standard but would not cause the rigidities that many then suspected had significantly contributed to the worsening of the worldwide 1930s depression. The agreement they adopted resulted in a system that was still, at least indirectly, based on gold, although by this time only the U.S. dollar was directly convertible into gold, and only among central banks. However, all signatories to the Bretton Woods Agreement were committed to maintain something approximating fixed rates of exchange in relation to the dollar, but with enough flexibility to allow them to manage their economies so as to produce full employment. Hence dollars rather than gold became the main components of the reserves of most central banks. The heyday of that system from the mid-1950s to the mid-1960s coincided with—and to an extent that is difficult to measure, helped to bring about—a period of exceptional economic growth (especially in western Europe and Japan) and expanding international trade. But it also placed severe constraints on the United States. By 1971 the United States had definitely ceased to guarantee the convertibility of the dollar. Since that date gold has been demonetized, even though the central banks of many countries continue to hold more or less significant stocks of gold. Floating rates are now the rule, with the exception of some countries that have more or less permanently pegged their currencies to a stronger one or others, such as the euro zone, that have established a monetary union.

A return to something like the gold standard has been advocated by some economists, notably those associated with the school of thought known as Austrian economics, so named because it can trace its roots to the writings of prominent Austrian economists such as Carl Menger. Adherents of Austrian economics have very little confidence in the ability of governments and central banks to effectively guide the course of economic events. It is, therefore, the self-regulating nature of the old gold standard that leads them to advocate revisiting this concept. They usually recommend the creation of a system in which the central banks would be forced to “play by the rules,” if necessary by privatizing these banks. Although this would certainly offer strong guarantees against inflation, the need for such a system appears less compelling in the early twenty-first century than it did in the 1970s and 1980s, when inflation was much more of threat than it has been since then. There is very little political support in the world for such a reform.

SEE ALSO Balance of Payments; Central Banks; Currency; Exchange Rates; Gold; Gold Industry; Inflation; Interest Rates; Mercantilism; Mining Industry; World War I; World War II

BIBLIOGRAPHY

Bordo, Michael D. 1993. The Bretton Woods International Monetary System: A Historical Overview. In A Retrospective on the Bretton Woods System, ed. Michael D. Bordo and Barry Eichengreen. Chicago: University of Chicago Press.

Eichengreen, Barry. 1992. Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. New York: Oxford University Press.

Kimball, James. 2005. The Gold Standard in Contemporary Economic Principle Textbooks: A Survey. Quarterly Journal of Austrian Economics 8 (3): 59–80.

Littlefield, Henry M. 1964. The Wizard of Oz : Parable of Populism. American Quarterly 16 (1): 47–58.

Laurent Dobuzinskis

GOLD STANDARD

A gold standard is a monetary system in which a country backs its currency with gold reserves and allows the conversion of its currency into gold. Tsarist Russia introduced the gold standard in January 1897 and maintained it until 1914. The policy was adopted both as a means of attracting foreign capital for the ambitious industrialization efforts of the late tsarist era, and to earn international respectability for the regime at a time when the world's leading economies had themselves adopted gold standards. Preparation for this move began under Russian Finance Minister Ivan Vyshnegradsky (1887–1892), who actively built up Russia's gold supply while restricting the supply of paper money. After a brief setback, the next finance minister, Sergei Witte (1892–1903), continued to amass gold reserves and restrict monetary growth through foreign borrowing and taxation. By 1896, Russian gold reserves had reached levels commensurate (in relative terms) with other major European nations on the gold standard. The gold standard proved so controversial in Russia that it had to be introduced directly by imperial decree, over the objections of the State Council (Duma). This decree was promulgated on January 2, 1897, authorizing the emission of new five-and tenruble gold coins. At this point the state bank (Gosbank) became the official bank of issue, and Russia pegged the new ruble to a fixed quantity of gold with full convertibility. This meant that the ruble could be exchanged at a stable, fixed rate with the other major gold-backed currencies of the time, which facilitated trade by eliminating foreign exchange risk.

Private foreign capital inflows increased considerably after the introduction of the gold standard, and currency stability increased as well. By World War I, Russia had been transformed from a state set somewhat apart from the international financial system to the world's largest international debtor. Proponents argue that the gold standard accelerated Russian industrialization and integration with the world economy by preventing inflation and attracting private capital (substituting for the low rate of domestic savings). They also point out that the Russian economy might not have recovered so quickly after the Russo-Japanese war and civil unrest in 1904 and 1905 without the promise of stability engendered by the gold standard. Critics, however, charge that the gold standard required excessively high foreign borrowing and tax, tariff, and interest rates to introduce. They further charge that once in place, the gold standard was deflationary, inflexible, and too preferential to foreign investment. Economist Paul Gregory argues that the entire debate may be moot, inasmuch as Russia had no choice but to adopt the gold standard in an international environment that practically required it for countries wishing to take advantage of the era's large-scale cross-border trade and investment opportunities. Russia abandoned the gold standard in 1914 under the financial pressure of World War I.

See also: foreign trade; industrialization; vyshne gradsky, ivan alexeyevich; witte, sergei yulievich

bibliography

Drummond, Ian. (1976). "The Russian Gold Standard, 1897–1914." Journal of Economic History 36(4): 633–688.

Gerschenkron, Alexander. (1962). Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Belknap Press of Harvard University Press.

Gregory, Paul. (1994). Before Command: An Economic History of Russia from Emancipation to the First Five-Year Plan. Princeton, NJ: Princeton University Press.

Von Laue, Theodore. (1963). Sergei Witte and the Industrialization of Russia. New York: Columbia University Press.

Juliet Johnson

GOLD STANDARD

The end of World War I triggered a heartfelt desire across much of the world to make a new world. But when it came to economics, it was a different story. The spectacular growth of the international economy before 1914 persuaded almost everyone that the main objective was to recreate the international gold standard system, a stable currency exchange mechanism that facilitated the movement of money and goods around by globe by stabilizing currency values at a fixed rate.

The war had caused most countries to abandon "gold," the shorthand term for the mechanism; however, by 1919 the need to recreate the gold standard seemed imperative thanks to the currency instability and inflation that were sweeping Europe. The lead was taken by the United States and Great Britain, which, sometimes with the assistance of the League of Nations, organized stabilization loans and technical support to help countries back onto gold, but the lion's share of the work was undertaken by national governments and their central banks. To be a member of the gold standard, countries had to follow the three central rules of what has become known as "orthodox economic policy." The first two rules applied to governments, which had to sustain a positive balance of payments (spending could not exceed income levels) and a positive balance of trade (exports should exceed imports). The third rule affected central banks, which were expected to shadow the interest rates of all the other members of the system and use all their resources to stay on gold when the national currency was under speculative pressure.

By 1928 forty-four countries had returned to the gold standard. Cracks in the system quickly began to appear, however, as countries struggled to follow the rules of economic orthodoxy, particularly after 1930. The effective end of the gold standard order came when its chief supporter, the United States, left the system on April 19, 1933. A temporary shortage of gold within the U.S. banking system had prompted Franklin Roosevelt to call an extended bank holiday, but the real reason for the U.S. break with gold was to free Roosevelt to make economic policy as he saw fit. Subsequently, interest rates were allowed to fall (bank loans now cost less) and the dollar fell on the international exchange by almost 40 percent, helping prices to rise and making U.S. exports cheaper and imports from gold countries more expensive. Equally importantly, Roosevelt was now able to increase government spending.

This U.S. shift in policy greatly increased the pressures on countries such as France and Poland, which were still committed to the system. In contrast to the 1920s, there were now competing views on monetary policy, making international cooperation all the more difficult to achieve given the increasingly nationalist climate of the 1930s.

See Also: MONETARY POLICY.

BIBLIOGRAPHY

Drummond, Ian M. The Gold Standard and the International Monetary System, 1900–1939. 1987.

Eichengreen, Barry. Golden Fetters. The Gold Standard and the Great Depression, 1919–1939. 1992.

Feinstein, Charles and Katherine Watson, eds. Banking, Currency and Finance in Europe between the Wars. 1995.

Patricia Clavin