Listening to those who advocate a “return” to the Gold Standard, one could not be blamed for thinking that the era when the world’s major currencies were backed by gold was a glorious time and that it was the state of affairs God intended for economic man.
Truth is, the world has rarely been on a gold standard. As the editors of our book tell us, the gold standard in fact “prevailed on a global scale only for a third of a century, from 1880 to 1914. Prior to that, currencies were generally based on silver instead of gold, or on a combination of the two metals.”
To be a bit more generous, we could agree with Jeffry A. Frieden, who in his article Coping With Complexity In the International System, contends that a bi-metallic currency system is “tantamount” to being on the gold standard as long as the gold-silver rate is stable. According to Frieden’s interpretation, the origins of the international gold standard really can be pushed back to the 1820s, since most major economies by then were bi-metallic.
Britain was one of the first countries of the modern era to adopt a single-metal standard, making gold the sole legal backing of the currency in 1821. However, in truth, the country had been on a de facto gold standard for over a hundred years– ever since 1717 when Isaac Newton, then Master Of The Mint, fiddled with the money-values of silver and gold. People soon discovered that if they brought their silver to the Mint to be turned into spendable coin– they would receive less money than what the straight silver was worth if they instead sold it in the international silver market. Thus, people stopped coining silver, and switched to coining and spending GOLD coin, thus making England’s money supply almost entirely dependent upon gold a hundred years before the official switch-over to one metal.
In the first half of the 1800s, both the United States and France were bi-metallic, their currencies backed by both gold and silver. The U.S. set its Mint prices so that the silver-to-gold price ratio remained stably at 15.5-to-1 for decades. Thus, every two gold units would were worth 31 equally sized silver units.
According to our editors, countries were unnerved by the discovery of large amounts of gold in California and elsewhere in the mid-1800s. This led the countries of Belgium and Switzerland, with silver-backed currencies, to begin, in the 1860s, to coin gold as well as silver. State the editors… “Their resumption of bimetallism turned out to be the first step toward the creation of a global gold standard.”
After humiliating France in the Franco-Prussian war of 1870-71, Germany decided to switch from a silver standard to a gold standard.
There were a complex of reasons, but a short list might include:
1) England –the world’s dominate economy and Germany’s last real rival– was on the Gold Standard; with transportation technology increasing rapidly during this period– and with the British navy and empire making global trade safer and more practical– Germany did not want to be kept outside the emerging global markets; if these markets were currently dominated by England, and England used gold for money, then Germany would use gold for money
2) Germany could give erstwhile foe France a kick while she was down by flooding the market with silver as Germany sold it off for gold. France, on the bi-metallic standard, was obligated to buy silver at a set rate when presented with it– but after France’s defeat, such a huge silver sell-off by Germany could cause great discomfort to France
3) By switching to a gold standard, the newly united Germany would reduce the power of its old aristocracy, the Junkers, who held immense farmlands (especially rye-growing lands); the flight of silver out of the Germany’s domestic marketplace would make the remaining (now slightly scarcer) gold-backed currency rise in value, thus inflating prices and making it harder for the aristocratic farmers to sell their rye crops abroad
4) it was good timing for Germany, since as our editors say, “the indemnity received during 1871-73 as victor in the Franco-Prussian War provided the resources needed to carry out a currency reform. Germany established a gold-based currency unit, the mark, and used her indemnity to purchase about half the gold needed for circulation.”
France responded to this flood of silver by reducing its silver purchases and limiting its own silver coinage. As the anchor for the bi-metallic bloc of national economies, France’s sudden favoring of gold coinage over silver coinage influenced other countries to do the same. Soon, countries all over Europe began shifting to gold.
The more countries adopted the gold standard, the more attractive it became for the remaining countries to also switch to gold—or else risk being left behind by the global economy. Within a decade, gold was the monetary standard for nearly all of Europe. Japan eventually followed as well. By the early 20th century, most of the world– excluding China, Persian, and some of Latin America– had converted to the gold standard, too.
It was only with the advent of World War One that nations began to go off gold. Some countries attempted to return to the gold standard after the War, but alas… the magic was gone, and World War Two finished off the worldwide gold standard… possibly for good.