The Gold Standard (in English: Gold Standard ) is a monetary Système in which the Unit of Account or monetary standard corresponds to a weight fixes Or.

In this system, any emission of Monnaie is done with a gold counterpart and guarantee of exchange. The parities of two different currencies are thus fixed compared to gold, and foreign exchange rates are stable between participating countries. Gold constitutes an international currency, which is used for the payment of the exchanges and like instrument of concerning the central banks of the country having adopted the system.

The partisans of the Gold Standard affirm that this system makes it possible to better resist the expansion Crédit and debt. Contrary to a fiduciary Currency, a currency with counterpart out of gold cannot be emitted arbitrarily by a State. This constraint prevents inflation by Dévaluation and raises in theory any uncertainty on the perenniality of the currency, which makes it possible the monetary authority to have a healthy credit, and to lend more easily. However, there exist many examples of country under Gold Standard which underwent crises of over-indebtedness or depression S.

The system of Gold Standard is used any more in no country; it was completely supplanted by the fiduciary currency.

Why gold?

Gold has several interesting characteristics to make a monetary standard of it: it is rare (the total quantity of gold is stable in time), durable, fungible (interchangeable), and easily identifiable by its acoustic color, its density, its ductility and its properties.

The merchants and traders made a current Unit of Account of it since the Antiquité, as well as an instrument of store of value. The exact methods of the evolution of the currency vary according to the time and the place, but the historians think in general that the strong value granted to gold (because of its beauty, its density, its corrosion resistance, its uniformity and the facility to remelt it) made of it a store of value and a Unit of Account for other instruments of store of value - thus, of Babylon, the bushel of Blé was the Unit of Account, and a corresponding quantity of gold (much less cumbersome) was used for representing and exchanging this value. The primitive monetary systems based on cereals used also gold to represent the value of the stored grain. The first banking systems appeared when the gold deposited in a bank could be transferred from an account to another by a system of giro, or lent with interest.

Within the framework of a monetary system founded on a product or a food product, the role of the Papier-monnaie is to limit the danger to transport gold directly, to limit the possibilities of cutting down the gold coins, and of avoiding the loss of the money Supply circulating because of Thésaurisation. The first attempts at use of the paper money were supported by the unreliability of the means of transport (long voyages being particularly dangerous), like by the desire of the States controlling or controlling the trade on their territory. The banknotes with gold guarantee are sometimes called “certificates”, which distinguishes them from other shapes of paper money.

However, for the majority of civilizations, it was the money which constituted the essence of the money supply, and which was used in the majority of the exchanges. Gold, was used to him as ultimate means of storage of value, and was used as means of payment only when the quantity - and thus the weight - of money were too high, in particular to pay armies. Gold supplanted the money like instrument of trade at a few times, like the golden age of Islam, the apogee of the city-States of Italy, and especially during the 19th century. Since, gold remained metal of reserve until the collapse of the system of Bretton Woods in 1971; it is used now as reserve of precaution vis-a-vis the actions of the central banks and the States, of liquid placement, and storage of value.

Awaited advantages of the Gold Standard

  • simplicity-certainty: the courses of the currencies in the sytéme are relatively stable; they fluctuate within narrow limits definite by what is called the gold points

  • self-balancing: when an imbalance appears in the Balance of the payments a mechanical process makes it possible to find balance:
Let us take the example of a country which has a adverse Balance of the payments: The deficit results in gold exits, synonymous with a reduction of the quantity of currency in circulation in the economy (since the monetary Création is related to gold stocks of Central Bank). This reduction has a deflationary effect: the prices will drop. This fall of the prices will make it possible to make more competitive the national products and thus to revitalize exports. The Balance of the payments finds balance.

Historical use of currency-but

See also: Gold

The first Metal used as Monnaie was the money, with ingots being useful for the trade dating of more than 4000 years. The oldest coins of Or go back to - 600. Previously, gold and the money were already used like stores of value and formed the base of the commercial contracts with Akkad, then in Egypt. The money remained the monetary metal most frequent for the current transactions until the 20th century. One finds it in certain bimetallic coins, like the coin of 20 pesos of the Mexico.

The Perse perceived the gold tax, and after the conquest of Alexandre Large the, all this gold was used as currency for its empire. Gold was used to pay the Mercenaire S and the Armée S, which sealed its importance: gold became synonymous with means of payment for military operations, which mentions Nicolas Machiavel in the Prince two thousand years later.

The first gold coins are struck in Lydie, by the king Crésus whose gold bearing sands of the river Pactole ensured an immense fortune to him. These parts are quickly used by the Greeks who generalize the use of it.

The Roman Empire used two principal, pure gold coins with 95-98%: the Aureus , a gold-silver alloy of approximately 7 grams, then, as from the 4th century, the solidus which weighed 4,4 grams including 4,2 of gold. The Roman factories of currency were very active, and of the million coins circulated under the republic then under the empire.

After the collapse of the Roman Empire of Occident and the exhaustion of the gold mines in Europe, the Byzantine Empire manufactured new parts, called Nomisma then Besant. During a few centuries, these parts remained manufactured to the Roman standards and were equivalent to the solidus , but the Empire decided to reduce of it the proportion of gold as from the 11th century; towards the end of the century, the currency in circulation contained nothing any more but gold 15% (in weight).

Starting from the end of the 7th century, an increasing share of the trade is done in Dinar S. the dinar was a weight and size, gold coin manufactured by the Arab Empire according to the Roman solidus similar to the Byzantine solidus . These two parts were jointly in circulation during approximately 350 years, until the decline of the solidus .

The dinar, as well as a silver coin named Dirham, in the beginning was manufactured by the Persan ones. The Califat S of the ic world Islam adopted these currencies, until the reform of the caliph Omeyyade Abd Al-Malik (685-705), who marked the “official” birth of the dinar. The new coins did not comprise any more illustrations but references to Allah, and contained a gold-silver fixed report/ratio. With the rise of the Islamic power, the dinar was established like dominant currency of the Western coast of the Africa until the North of the India, it until the end of the 13th century, and remained one of the most current currencies during the following centuries. Thus, the solidus - under various names but always with the same size, the same weight, and the same gold content - remained the principal Unit of Account during more than 1300 years, and survived three empires.

In 1284, the République of Venice manufactures its first gold coins; the Ducat becomes the European currency most current for the five following centuries, because of the strategic role of Venice in the trade with the Islamic world, then of its capacity to attract new gold stocks. Other coins, like the Guilder or noble English make their appearance about the same time and accompany the expansion by the trade.

With the conquest of the Aztec Empire and Empire INCA, the Spain finds access to new money and gold stocks. The principal Unit of Account of Spanish was the Escudo, and the part of 8 escudos, or Doublon, was most known. A doubled bloom weighs 27,468 grams, and is made of gold to 22 carats (92%); its value is 16 times that of the peso , which contains the equivalent money weight. Because of its abundance, gold becomes only legal tender in the the Spanish Antilles in 1704. With the the United States, the Spanish currency is much more current than the English currency, and the US Dollar is in the beginning equivalent to the peso . The foreign exchange market of Philadelphia is one of the pricipaux centers of exchange of Spanish currency.

Modern Gold Standard

The adoption of the Gold Standard was done gradually, and there exist dissensions between historians on the date of adoption of the first “true” system. The oldest mention is English: in 1717, Isaac Newton analyzes the coins and draws some a gold-silver relation, this relation is officialized by a law of the Anne queen. However, the majority of the historians use more strict criteria: a Gold Standard should have only one source official of paper money, and this paper must be convertible out of gold. The English case does not answer this criterion.

The crisis of the silver money and banknotes (1750-1870)

The events of the end of the 18th century and the beginning of the 19th century are determining for the adoption of the Gold Standard on a world level at the end of this last century. At the end of the 18th century, the silver reserves of the countries of Europe and the United States decrease because of the wars and by the trade with the China. Indeed, China exports goods towards Europe but very little imports some, which has as a result “to capture” an increasing share of the money stock. In Europe, the number of struck parts falls regularly, and an increasing share of the money supply consists of ticket and banknotes on actions .

In the years 1790, England must face a severe money shortage; it ceases striking large silver coins, it manufactures parts “tokens” without intrinsic value, and strikes again foreign parts. After the end of the Napoleonean Wars, England undertakes an ambitious programme of manufacture of currency, which includes/understands the creation of gold sovereigns, of crowns and half-crowns of money, and of farthings of copper in 1821. Nearly 40 million shillings are struck between 1816 and 1820, like 17 and 1,3 million half-crown million crowns. In 1819, the law on the resumption of the payments in currency ( Act for the Resumption off Cash Payments ) indicates that convertibility will begin again in 1823, does this one of it is possible since 1821. In the years 1820, the district banks issue tickets of small denominations. As from 1826, this mission is partially taken of load by new regional branches of the Banque of England, and in 1833 the banknotes of England become legal tender. In 1844, the Law on the charter of the banks ( Bank Charter Act ) declares that the banknotes of England are the only legal tender, and that they must be guaranteed by a cover supplements out of gold. It is this date which corresponds to the establishment of the Gold Standard in Great Britain, in a strict sense.

Consequently, several British colonies, lack in their currency-money turn, are obliged to strike their clean token-currency. Among the private transmitters most famous, the company Strachan and Company , which strikes tokens in the Griqua Land as from 1874, is at the origin of the first currency with success of South Africa.

The the United States adopt a silver standard with parity with the Spanish peso in 1785. The law on the currency of 1792 codifies this practice and establishes the parity with gold, tandis the First bank of the United States holds the monetary reserves of the federal government. In practice, this system is only one partial standard, since the First bank does not have the obligation to hold the money-metal counterpart of all the currency which it emits. Several attempts at introduction of a bimetallic system are followed until in the years 1920. The money and gold coins constitute the legal tender, of which many pesos and reals Spanish. Because of the immense debt contracted at the time of the American Revolution, the silver coins of the US government disappear gradually from circulation, and in 1806 the president Thomas Jefferson suspends the striking of new coins.

In 1848, the law on the independence of the Treasury separates the accounts from the federal government and the banking system, and imposes on the Département of the Treasury a strict standard. However, the gold-silver convertion rate overestimates this last compared to the gold strong demand necessary to the foreign trade, mainly the Great Britain. According to the Law of Gresham, the money flows and gold flees the country. This erosion of the quantity of gold in circulation in favor of the money makes the gold prospection necessary, and allows the Gold rush of California in 1849. In 1853, the United States reduces the money weight of the parts to maintain circulation; in 1857, the foreign coins whose peso lose their statute of legal tender.

The ultimate crisis of the international banking system bursts in 1857, when the US banks suspend any silver payment; monetary instability is propagated with the other countries. In 1861, the US government suspends the payments gold and silver, which puts a term at the attempts at institution of a silver standard. Between 1860 and 1871, some attempts at resurrection of a bimetallic standard take place, but the discovery of money seams in the American West makes illusory the idea that it is still about a rare metal.

The monetary independent source of instability during this period comes from the interaction between the central banks and the base of the currencies. Economic stability came from the combination of several factors: restriction of the emission of new tickets, official monopoly of direct and indirect emission, existence of a central bank and only one unit of value. The attempts to be unaware of one of these factors are at the origin of episodical monetary crises, marked by the devaluation of the currency, the abandonment of the money like holds value, or a depression caused by the State which requires payments out of metal, which withdraws it economic circulation. In parallel, the development of industry is accompanied by an increased request for financial credit, and large banks are founded in several countries, like Japan in 1872. The need for having solid bases for all the monetary transactions leads to the fast adoption of the Gold Standard during the following period.

Installation of the international Gold Standard (1870-1900)

The Germany is founded following the Guerre free-Prussian; she creates the Reichsmark, adopts a strict Gold Standard, and uses the gold extracted in the mines from South Africa to increase the money Supply. The other countries join quickly with this system, which benefits from the properties of gold like unit of stable value, exchangeable and universal. This adoption goes hand in hand with the first Mondialisation.

The system thus created becomes the first true system international currency, namely a whole of rules defining the modes of determination of the course of the currencies and the nature of the international reserves allowing the payment of the international exchanges.

The Gold Standard replaces the bimetalism: the currency was convertible before at the same time out of gold and money. This adoption is in the majority of the cases an adoption above all de facto , made official later on:

Dates of Adoption of the Gold Standard:

During the years 1870, the context of Deflation and depression is favorable to the re-establishment of the money like currency, but the few attempts carried out show failures. In 1879, only the gold coins are accepted in fact in the Latin Monetary Union (joined by the Greece), although the money is theoretically legal.

Alternative currencies

The crisis of the years 1870 also pushes with the adoption of currencies not based on gold. Thus, the money orders are born in Great Britain in 1881, and become a legal tender during the Second world war. In the United States, “Greenback Party” militates for the progressive withdrawal of any paper money unguaranteed by gold.

Tax effects

The increase in trade allows industrial specialization, while the population of the industrialized countries increases quickly, which increases the request for agricultural produce. The need for importing more agricultural produce, joint with that of the agricultural exporters to import machines in order to industrialize themselves, causes a deep reorganization of the tax systems, the majority of the country giving up little by little the Customs duties with the profit of income taxes or on consumption. These changes are accompanied by one pressure to the fall of the wages of certain categories of workers. The role of the Gold Standard in this transformation remains prone to debate.

Effects on the rural world

In the United States, a movement anti-standard-but is constituted in the years 1890. It takes its origin in South-west and the Grandes Plains. Many farmers consider indeed that the scarcity of gold, particularly apart from the great banking places of the East, is wanted and makes it possible to the bankers to cause crises of credit, which inserts the farmers of the West in the debt, and led to the seizure of their property to the profit of the bankers. The Populist party, founded in Lampasas (Texas), has as a main clause “easy” a money policy, not based on the gold, which would circulate more quickly and would make it possible to the farmers to more easily reach the credit. The opposition to the Gold Standard knows its apogee at the time of the presidential campaign of 1896, when the democratic candidate , William Jennings Bryan, declares his refusal of this system in his “speech of the gold Cross”. It compares with it the Gold Standard and its effects on the farmers with the Couronne of spines carried by Jesus-Christ at the time of her Crucifixion. After being beaten, Bryan is represented in 1900 and 1908, each time without national success, but by carrying the States of the South and the Large plains. Some see in the Magician of OZ, beyond of a work for children, a political critic of the Gold Standard by the means of the “gold brick road”.

Effects on interest rates

At the end of the 19th century spreads a restrictive monetary policy in order to limit outgoing gold flows and to maintain of them reserves important in the central banks. This policy crédibilise attachment with the Gold Standard. According to Lawrence Officer and Alberto Giovanni, these effects are visible by comparing the rate of the Bank of England and flows between book, dollar, mark and frank. Between 1889 and 1908, it book maintains a parity fixed with the dollar 99% of time, and 92% of time with the mark. According to them, the key of the credibility of the system was the devotion of the Bank of England to the stability of the exchanges, while adjusting each time necessary its interest rate: 200 times during this period, are a frequency higher than that of the current adjustments of the central banks.

Apogee with the crisis (1901-1932)

Increase in the standard of living

About 1900, the majority of the industrialized countries recognize the need for a Prêteur as a last resort. The importance of a Central bank in the financial system was stressed at the time of rescues, as that of the Barings bank carried out by the Banque of England, whereas this one was in quasi-bankruptcy. Only the the United States still did not have a Central bank.

Some banking panics of years 1890 and 1900 were certainly allotted by certain observers to the centralization of the productive and banking system. However, this centralization also allows a rate of industrialization increased, which involves a rise of the standard of living. Majority of Europe east in peace and relatively prosperous, in spite of a certain socialist agitation and communist, following the extremely hard conditions of the industrial revolution.

Abandonment of the Gold Standard during the War

This situation finds its term brutally when the First World War bursts in 1914. The the United Kingdom is quickly constrained to give up the convertibility of the tickets. At the end of the war, England is in fact in a fiduciary system of currency, in which the money orders and the goods with the treasure are monétisés. The gigantic requirements in military material cause inflation. All the countries choose to print more currency than they do not have gold counterpart, cash on the war reparations once the acquired victory, over the model used by Prussia at the time of the Guerre free-Prussian. The United States and Great Britain set up a succession of intended measures to control the gold circulation and to reform the banking system, but are finally constrained to suspend the gold parity to finance the effort of war.

The Traité of Versailles imposes on Germany and the demolished central empires of the war reparations, whose France hopes that they will enable him to rebuild its economy devastated by the conflict. Germany, constraint to give most of sound gold under repairs, gives up emitting Reichsmarks of gold and chooses the paper money.

During the Twenties, the United States which benefits from a commercial Balance active provides by the plans Dawes and Young, the required funds in Germany to refund France, so that ultimately France refunds its debts with respect to the United States. After the war, the Weimar Republic must face hyperinflation (the prices are multiplied by a half billion between 1923 and 1924) and must set up a provisional currency, the Rentenmark , to put an end to it. This plan functioned, although it still took a year to re-examine to appear of gold Reichmarks.

Return to the Gold Standard

The purpose of the Accords of Genoa of 1922 are to restore the monetary order world completion disorganized by the First World War. This conference is decided on the initiative of the Great Britain. It joins together all the countries having taken part in the conflict except the the United States.

These agreements envisage:

  • that the countries must as fast as possible, if possible, to restore the convertibility of their gold currency,
  • the Gold Bullion Standard: convertibility in ingots,
  • the Gold Exchange Standard: the nonconvertible gold currencies will be able the being in hard currency or key currencies, i.e. in gold currency convertible. It acts at the time of the Dollar.

The the United Kingdom returns to the Gold Standard in 1925, according to the opinion of the preserving economists of then, in spite of the reserves of the Chancellor of the Exchequer, Winston Churchill. In spite of the high inflation to the exit the war, Churchill adopts the parity of pre-war period. In order to return to this parity, the government leads a monetary austerity policy between 1920 and 1925. The actual value of the Pound sterling out of gold is gradually increased, which causes a Déflation economy.

John Maynard Keynes is one of the minority economists opposed to the restoration of the parity of pre-war period; he considers indeed that this parity is impossible to find and that the scarcity resulting from the currency is likely to cause a collapse of the economy. He qualifies even the Gold Standard of “barbarian relic”.

Deflation touches all the parts of the British Empire where the book is used as principal Unit of Account.

Great Depression and the Second world war (1933-1945)

The Crise of 1929 returns the parity with intolerable gold in many countries. The United Kingdom gives up it in 1931, the Sweden since 1929, the the United States in 1933.

The conference of London

In 1933, the conference of London signs the death of the system international currency. The United Kingdom and the United States wished a possible return to the Gold Standard; the US president Franklin Delano Roosevelt had even stated that a return to monetary stability “was to be based on gold”, but neither one nor the other country was ready to go back there immediately. The delegations of France and Italy insist with an immediate return with a system of Gold Standard. At the time of the conference, a proposal to stabilize foreign exchange rates between France, the United Kingdom and the United States, based on a system of drawing rights, is disallowed.

The dissension front door all on the value of gold in a new system. Cordell Hull, the Secretary of State américian, had as instructions to require a reflation of the prices before any return to a Gold Standard. The United Kingdom was in addition suspected of wanting to exploit the trade agreements within the the Commonwealth in order to avoid any budgetary austerity measure. Since the dominant interpretation of the collapse of the system of Gold Standard at that time is the adoption by the United States and the United Kingdom of a too strong parity with gold, these behaviors prevent any agreement.

Another point of disagreement is the role of the customs duties in the collapse of the Gold Standard: the US government (democratic) shows its predecessors (republican) to have worsened the crisis by adopting protectionist tariff barriers.

The prohibition of detention of gold

As from the years 1930, several countries whose the United States, take measures to prohibit the private gold detention. Franklin Delano Roosevelt promulgates the ordinance ( Executive order ) 6102 in 1933 and the Law on the gold reserves ( Gold Reserve Act ) in 1934, which punish the gold possession of a fine until 10  000 dollars. The jewels and collections of coins are exempted, and prohibition will never be applied very severely. It is raised in 1975.

For this period, the American citizens are held to hold only tickets of the Central bank. The Supreme court ratifies the law in 1934. Certain preserving movements see in this law a usurpation of the right to the private property.

Stabilization of the international financial markets

During the years 1930, the majority of the countries negotiate bilateral trade agreements, and starting from 1935 their economic policy is conditioned by the idea that a conflict of great width is increasingly probable. The austerity measures taken in the years 1920 for restabiliser the international financial system had had as a consequence a reduction in the military expenditure; those increase then quickly, encouraged by the armament of the powers of the Axis, the war in Asia, and fear to see the Soviet Union exporting its model of communist revolution. The priority granted to this expenditure makes impossible the return to a Gold Standard, because this one requires a balance in the budget. In the same way, the United States, the Roosevelt government gives up it after 1937, after its attempt to balance the budget caused a new recession.

Mefo-Wechsel

In 1934, the German government creates the Mefo-Wechsel, a system of “true-false” currency based on ackowledgements of debt exchanged by the companies, emitted by the Metallurgische Forschung or MEFO. The MEFO makes it possible to circumvent the financial restrictions of the treated of Versailles, and contributes to the rearmament of Germany.

Within the framework of its persecutions against the Jews, Roma, the Slavic ones and the handicapped people, the Nazi Germany seizes their gold to finance his effort of war. Among the banks which hold these gold deposits appear of the Swiss banks. Gold is then deposited with the Reichsbank and is used as counterpart for exchangeable banknotes against MEFO.

In same time, control measures of the prices and wages, together with threat of the camps of internment, manage to prevent the appearance of hyperinflation.

In 1939, the value of the MEFO reaches 12 billion marks, against 19 billion marks of official debt.

Progressive renouncement of Great Britain

For the period 1939-1942, the United Kingdom spends most of its gold stock to buy weapons and ammunition in “cash and curry” at the United States and other countries. Winston Churchill concludes from it that the return to the system of pre-war period will be difficult; in the same time John Maynard Keynes which had been opposed to the return to the Gold Standard in the years 1920 gains in influence in the government, and its proposals are concretized finally by the Accords of Bretton Woods.

The system of Bretton Woods (1946-1971)

See also: Agreements of Bretton Woods

The agreements of Bretton Woods set up a system of standard gold exchange: the value of the US Dollar is directly indexed on gold (with 35 dollars per ounce), while the other currencies are indexed on the dollar. The reserves of the Central banks must then be made up of currencies and either of gold. The US government guarantees the value of the dollar, but is not obliged to have a gold counterpart with the emitted dollars.

Theory

August 1st
  • Ferdinand Lips, Gold Wars , Paperback.
  • Jean-Marc Berthoud, Swiss Gold Standard and the new world order .

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