Gold Standard

Gold Standard. A gold standard is adopted when a country establishes convertibility, at a fixed official price, between its currency and gold, thereby implicitly limiting its circulating money to the amount of gold it holds.Applied internationally, a gold standard establishes fixed exchange rates among different national currencies. Balance‐of‐payment settlements are made by transfers of gold.

An international financial system based on the gold standard emerged during the nineteenth century. Britain, already on a de facto gold basis, formally adopted the standard in 1821. From the 1870s through World War I, most European and Latin American nations as well as Japan and the United States abandoned bimetallic standards, which based currencies on both gold and silver, and embraced the gold standard. Not only was it economically advantageous to join the currency standard used by the world's major industrial and financial power, Great Britain, but a huge rise in world silver production made it impossible to maintain a stable price between gold and silver, further undercutting bimetallism.

In the United States, the Coinage Act of 1873 officially demonetized silver, legally confirming a gold‐based currency that—because of silver's relatively high price—was already the de facto standard. As gold entered a prolonged period of deflation, however, farmers (eager to expand the money supply and thus the availability of credit) joined U.S. silver‐mining interests in denouncing this “Crime of ’73.” Advocating “free coinage of silver,” they vocally embraced the new agriculturally based Populist party. In 1896 the “free silver” forces captured the Democratic party, as presidential candidate William Jennings Bryan excoriated bankers and other monied elites for sacrificing the interests of common people on a “cross of gold.” The Republican candidate, William McKinley, argued that the gold standard would enhance trade and financial ties with the “civilized” world and stabilize banking and credit. McKinley's victory led to passage of the Gold Standard Act of 1900, fixing gold as the basis of the U.S. currency.

The international gold standard worked fairly well between 1870 to 1913, and economists came to accept the idea (or myth) that it was essential to global prosperity and peace. After World War I forced many nations to abandon the gold standard, most policy‐makers and theoreticians urged its restoration. Throughout the 1920s, international conferences, economic advisers, and central banks all worked for this goal. By 1926 the gold standard was functioning in nearly forty countries (China and the Soviet Union were the principal exceptions). But the system proved too inflexible to counteract the banking crises of the late 1920s, which touched off the Great Depression of the 1930s. Indeed, the economic historian Barry Eichengreen argues that the the gold‐standard's rigidity actually accelerated the economic and political crisis. Great Britain abandoned the gold standard in 1931, and most nations, including the United States, followed.

After World War II, international leaders again tried to reconstruct a functioning gold standard, modifying its rules to provide greater oversight and flexibility. The 1944 Bretton Woods Conference established the International Monetary Fund to monitor economic policies, adjust the gold‐based exchange rates of member nations, and provide credits for structural readjustments. This modified gold standard, which spread through much of the noncommunist world during the 1950s, also proved short‐lived. For a variety of reasons, especially the mounting pressure against the U.S. dollar in the early 1970s, country after country abandoned the Bretton Woods system. After 1973, floating exchange rates, none pegged to gold, replaced the venerable gold standard.
See also Banking and Finance; Depressions, Economic; Foreign Trade, U.S.; Free Silver Movement; Gilded Age; Monetary Policy, U.S.; Populist Era.

Bibliography

Barry Eichengreen , Globalizing Capital: A History of the International Monetary System, 1996.

Emily S. Rosenberg