Gold standard

The United Kingdom slipped into a gold specie standard in 1717 by over-valuing gold at times its weight in silver. It was unique among nations to use gold in conjunction with clipped, underweight silver shillings, addressed only before the end of the 18th century by the acceptance of gold proxies like token silver coins and banknotes. From the more widespread acceptance of paper money in the 19th century emerged the gold bullion standard, a system where gold coins do not circulate, but authorities like central banks agree to exchange circulating currency for gold bullion at a fixed price. First emerging in the late 18th century to regulate exchange between London and Edinburgh, Keynes (1913) noted how such a standard became the predominant means of implementing the gold standard internationally in the 1870s. Restricting the free circulation of gold under the Classical Gold Standard period from the 1870s to 1914 was also needed in countries which decided to implement the gold standard while guaranteeing the exchangeability of huge amounts of legacy silver coins into gold at the fixed rate (rather than valuing publicly held silver at its depreciated value). The term limping standard is often used in countries maintaining significant amounts of silver coin at par with gold, thus an additional element of uncertainty with the currency's value versus gold. The most common silver coins kept at limping standard parity included French 5-franc coins, German 3-mark thalers, Dutch guilders, Indian rupees, and U.S. Morgan dollars. Lastly, countries may implement a gold exchange standard, where the government guarantees a fixed exchange rate, not to a specified amount of gold, but rather to the currency of another country that is under a gold standard. This became the predominant international standard under the Bretton Woods Agreement from 1945 to 1971 by the fixing of world currencies to the U.S. dollar, the only currency after World War II to be on the gold bullion standard. ==History before 1873==

Silver and bimetallic standards until the 19th century The use of gold as money began around 600 BCE in Asia Minor and has been widely accepted ever since, together with various other commodities used as money, with those that lose the least value over time becoming the accepted form. In the early and high Middle Ages, the Byzantine gold solidus or bezant was used widely throughout Europe and the Mediterranean, but its use waned with the decline of the Byzantine Empire's economic influence. However, economic systems using gold as the sole currency and unit of account never emerged before the 18th century. For millennia it was silver, not gold, which was the real basis of the domestic economies: the foundation for most money-of-account systems, for payment of wages and salaries, and for most local retail trade. Gold functioning as currency and unit of account for daily transactions was not possible due to various hindrances which were only solved by tools that emerged in the 19th century, among them: • Divisibility: Gold as currency was hindered by its small size and rarity, with the dime-sized ducat of 3.4 grams representing 7 days' salary for the highest-paid workers. In contrast, coins of silver and billon (low-grade silver) easily corresponded to daily labor costs and food purchases, making silver more effective as currency and unit of account. In mid-15th century England, most highly paid skilled artisans earned 6d a day (six pence, or 5.4 g silver), and a whole sheep cost 12d. This made the ducat of 40d and the half-ducat of 20d of little use for domestic trade. • Non-existence of banknotes: Banknotes were mistrusted as currency in the first half of the 18th century following France's failed banknote issuance in 1716 under economist John Law. Banknotes only became accepted across Europe with the further maturing of banking institutions, and also as a result of the Napoleonic Wars of the early 19th century. Counterfeiting concerns also applied to banknotes. The earliest European currency standards were therefore based on the silver standard, from the denarius of the Roman Empire to the penny (denier) introduced by Charlemagne throughout Western Europe, to the Spanish dollar and the German Reichsthaler and Conventionsthaler which survived well into the 19th century. Gold functioned as a medium for international trade and high-value transactions, but it generally fluctuated in price versus everyday silver money. France was the most important country which maintained a bimetallic standard during most of the 19th century. Gold standard origin in Britain The English pound sterling introduced was initially a silver standard unit worth 20 shillings or 240 silver pennies. The latter initially contained 1.35 g fine silver, reduced by 1601 to 0.464 g (hence giving way to the shilling [12 pence] of 5.57 g fine silver). Hence the pound sterling was originally 324 g fine silver reduced to 111.36 g by 1601. The problem of clipped, underweight silver pennies and shillings was a persistent, unresolved issue from the late 17th century to the early 19th century. In 1717 the value of the gold guinea (of 7.6885 g fine gold) was fixed at 21 shillings, resulting in a gold–silver ratio of 15.2, higher than prevailing ratios in Continental Europe. Great Britain was therefore de jure under a bimetallic standard with gold serving as the cheaper and more reliable currency compared to clipped silver or £1 coin was the preeminent circulating gold coin during the classical gold standard period. Following the Napoleonic Wars, Britain legally moved from the bimetallic to the gold standard in the 19th century in several steps: • The 21-shilling guinea was discontinued in favor of the 20-shilling gold sovereign, or £1 coin, which contained 7.32238 g fine gold • The permanent issuance of subsidiary, limited legal tender silver coinage, commencing with the Great Recoinage of 1816 • The 1819 Act for the Resumption of Cash Payments, which set 1823 as the date for resumption of convertibility of Bank of England banknotes into gold sovereigns, and • The Bank Charter Act 1844, which institutionalized the gold standard in Britain by establishing a ratio between gold reserves held by the Bank of England versus the banknotes which it could issue, and by significantly curbing the privilege of other British banks to issue banknotes. From the second half of the 19th century Britain introduced its gold standard to Australia, New Zealand, and the British West Indies in the form of circulating gold sovereigns as well as banknotes that were convertible at par into sovereigns or Bank of England banknotes. Effects of the 19th century gold rush s were minted as a result of the California gold rush. Up until 1850 only Britain and a few of its colonies were on the gold standard, with the majority of other countries being on the silver standard. France and the United States were two of the more notable countries on the bimetallic standard. France's actions in maintaining the French franc at either 4.5 g fine silver or 0.29032 g fine gold stabilized world gold–silver price ratios close to the French ratio of 15.5 in the first three quarters of the 19th century by offering to mint the cheaper metal in unlimited quantities – gold 20-franc coins whenever the ratio is below 15.5, and silver 5-franc coins whenever the ratio is above 15.5. The United States dollar was also bimetallic de jure until 1900, worth either 24.0566 g fine silver, or 1.60377 g fine gold (ratio 15.0); the latter revised to 1.50463 g fine gold (ratio 15.99) from 1837 to 1934. The silver dollar was generally the cheaper currency before 1837, while the gold dollar was cheaper between 1837 and 1873. The nearly coincidental California gold rush of 1849 and the Australian gold rushes of 1851 significantly increased world gold supplies and the minting of gold francs and dollars as the gold–silver ratio went below 15.5, pushing France and the United States into the gold standard with Great Britain during the 1850s. The benefits of the gold standard were first felt by this larger bloc of countries, with Britain and France being the world's leading financial and industrial powers of the 19th century while the United States was an emerging power. By the time the gold–silver ratio reverted to 15.5 in the 1860s, this bloc of gold-utilizing countries grew further and provided momentum to an international gold standard before the end of the 19th century: • Portugal and several British colonies commenced with the gold standard in the 1850s and 1860s • France was joined by Belgium, Switzerland and Italy in a larger Latin Monetary Union based on both the gold and silver French francs. • Several international monetary conferences in the last third of the 19th century began to consider the merits of an international gold standard, albeit with concerns on its impact on the price of silver should several countries make the switch. ==The international classical gold standard, 1873–1914==

Rollout in Eurasia and the United States The international classical gold standard commenced in 1873 after the German Empire decided to transition from the silver North German thaler and South German gulden to the German gold mark, reflecting the sentiment of the first international monetary conference in 1867, and utilizing the 5 billion gold francs (worth 4.05 billion marks or 1,451 metric tons) in indemnity demanded from France at the end of the Franco-Prussian War. This transition done by a large, centrally located European economy also triggered a switch to gold by several European countries in the 1870s and led as well to the suspension of the unlimited minting of silver 5-franc coins in the Latin Monetary Union in 1873. The following countries switched from silver or bimetallic currencies to gold in the following years (Britain is included for completeness): • 1816, British Empire: one pound: from 111.37 g silver to 7.32238 g gold; ratio 15.21 • 1873, German Empire: one North German thaler or 1 South German gulden of 16.67 g silver, converted to 3 German gold marks of 3/2.79 = 1.0753 g gold; ratio 15.5 • 1873, Latin Monetary Union franc: from 4.5 g silver to 9/31 = 0.29032 g gold; ratio 15.5 • 1873, United States dollar, by the Coinage Act of 1873: from 24.0566 g silver to 1.50463 g gold; ratio 15.99 • 1875, Scandinavian Monetary Union: Rigsdaler specie of 25.28 g silver, converted to 4 krone (or krona) of 4/2.48 = 1.6129 g gold; ratio 15.67 • 1875, Netherlands: the Dutch Guilder from 9.45 g silver to 0.6048 g gold; ratio 15.625. • 1881, Ottoman Empire: the Ottoman lira • 1892, Austria-Hungary: the Austro-Hungarian florin of 11.11 g silver, converted to two Austro-Hungarian krone of 2/3.28 = 0.60976 g gold; ratio 18.22 • 1897, Russian Empire: the ruble from 18 g silver to 0.7742 g gold; ratio 23.25. note of 1898, with text saying it is worth 17.424 dolya (0.7742 grams) of gold The gold standard became the basis for the international monetary system after 1873. According to economic historian Barry Eichengreen, "only then did countries settle on gold as the basis for their money supplies. Only then were pegged exchange rates based on the gold standard firmly established." The gold standard was not firmly established in non-industrial countries. Central banks and the gold exchange standard s continuing to circulate at par with gold dollars despite their silver value being less. As feared by the various international monetary conferences, the switch to gold, combined with record U.S. silver output from the Comstock Lode, plunged the price of silver after 1873 with the gold–silver ratio climbing to historic highs of 18 by 1880. Most of continental Europe made the conscious decision to move to the gold standard while leaving the mass of legacy (and erstwhile depreciated) silver coins remaining unlimited legal tender and convertible at face value for new gold currency. The term limping standard was used to describe currencies whose nations' commitment to the gold standard was put into doubt by the huge mass of silver coins still tendered for payment, the most numerous of which were French 5-franc coins, German 3-mark Vereinsthalers, Dutch guilders and American Morgan dollars. Britain's original gold specie standard with gold in circulation was not feasible anymore with the rest of Continental Europe also switching to gold. The problem of scarce gold and legacy silver coins was only resolved by national central banks taking over the replacement of silver with national bank notes and token coins, centralizing the nation's supply of scarce gold, providing for reserve assets to guarantee convertibility of legacy silver coins, and allowing the conversion of banknotes into gold bullion or other gold-standard currencies solely for external purchases. This system is known as either a gold bullion standard whenever gold bars are offered, or a gold exchange standard whenever other gold-convertible currencies are offered. John Maynard Keynes referred to both standards above as simply the gold exchange standard in his 1913 book Indian Currency and Finance. He described this as the predominant form of the international gold standard before the First World War, that a gold standard was generally impossible to implement before the 19th century due to the absence of recently developed tools (like central banking institutions, banknotes, and token currencies), and that a gold exchange standard was even superior to Britain's gold specie standard with gold in circulation. As discussed by Keynes: "Rules of the Game" In the 1920s John Maynard Keynes retrospectively developed the phrase "rules of the game" to describe how central banks would ideally implement a gold standard during the prewar classical era, assuming international trade flows followed the ideal price–specie flow mechanism. Violations of the "rules" actually observed during the classical gold standard era from 1873 to 1914, however, reveal how much more powerful national central banks actually are in influencing price levels and specie flows, compared to the "self-correcting" flows predicted by the price-specie flow mechanism. Keynes premised the "rules of the game" on best practices of central banks to implement the pre-1914 international gold standard, namely: • To substitute gold with fiat currency in circulation, so that gold reserves may be centralized • To actually allow a prudently determined ratio of gold reserves to fiat currency of less than 100%, with the difference made up by other loans and invested assets, such reserve ratio amounts consistent with fractional reserve banking practices • To exchange circulating currency for gold or other foreign currencies at a fixed gold price, and to freely permit gold imports and exports • Central banks were actually allowed modest margins in exchange rates to reflect gold delivery costs while still adhering to the gold standard. To illustrate this point, France may ideally allow the pound sterling (worth 25.22 francs based on ratios of their gold content) to trade between so-called gold points of 25.02F to 25.42F (plus or minus an assumed 0.20F/£ in gold delivery costs). France prevents sterling from climbing above 25.42F by delivering gold worth 25.22F or £1 (spending 0.20F for delivery), and from falling below 25.02F by the reverse process of ordering £1 in gold worth 25.22F in France (and again, minus 0.20F in costs). • Finally, central banks were authorized to suspend the gold standard in times of war until it could be restored again as the contingency subsides. Central banks were also expected to maintain the gold standard on the ideal assumption of international trade operating under the price–specie flow mechanism proposed by economist David Hume wherein: • Countries which exported more goods would receive specie (gold or silver) inflows, at the expense of countries which imported those goods. • More specie in exporting countries will result in higher price levels there, and conversely in lower price levels amongst countries spending their specie. • Price disparities will self-correct as lower prices in specie-deficient will attract spending from specie-rich countries, until price levels in both places equalize again. In practice, however, specie flows during the classical gold standard era failed to exhibit the self-corrective behavior described above. Gold finding its way back from surplus to deficit countries to exploit price differences was a painfully slow process, and central banks found it far more effective to raise or lower domestic price levels by lowering or raising domestic interest rates. High price level countries may raise interest rates to lower domestic demand and prices, but it may also trigger gold inflows from investors – contradicting the premise that gold will flow out of countries with high price levels. Developed economies deciding to buy or sell domestic assets to international investors also turned out to be more effective in influencing gold flows than the self-correcting mechanism predicted by Hume. • Italy tolerated in 1866 the issuance of (forced legal tender paper currency) worth less than the Latin Monetary Union franc. It also flooded the Union with low-valued subsidiary silver coins worth less than the franc. For the rest of the 19th century the Italian lira traded at a fluctuating discount versus the standard gold franc. • In 1883 the Spanish peseta went off the gold standard and traded below parity with the gold French franc. However, as the free minting of silver was suspended to the general public, the peseta had a floating exchange rate between the value of the gold franc and the silver franc. The Spanish government captured all profits from minting (5-peseta coins) out of silver bought for less than 5 ptas. While total issuance was limited to prevent the peseta from falling below the silver franc, the abundance of in circulation prevented the peseta from returning at par with the gold franc. Spain's system where the silver traded at a premium above its metallic value due to relative scarcity is called the fiduciary standard and was similarly implemented in the Philippines and other Spanish colonies in the end of the 19th century. ==In the United States==

, was steady until the collapse of the Bretton Woods system in the mid-1970s.|left Inception In the 1780s, Thomas Jefferson, Robert Morris and Alexander Hamilton recommended to Congress that a decimal currency system be adopted by the United States. The initial recommendation in 1785 was a silver standard based on the Spanish milled dollar (finalized at 371.25 grains or 24.0566 g fine silver), but in the final version of the Coinage Act of 1792 Hamilton's recommendation to include a $10 gold eagle was also approved, containing 247.5 grains (16.0377 g) fine gold. Hamilton therefore put the U.S. dollar on a bimetallic standard with a gold–silver ratio of 15.0. American-issued dollars and cents remained less common in circulation than Spanish dollars and reales (1/8th dollar) for the next six decades until foreign currency was demonetized in 1857. $10 gold eagles were exported to Europe where it could fetch over ten Spanish dollars due to their higher gold ratio of 15.5. American silver dollars also compared favorably with Spanish dollars and were easily used for overseas purchases. In 1806 President Jefferson suspended the minting of exportable gold coins and silver dollars in order to divert the United States Mint's limited resources into fractional coins which stayed in circulation. Pre-Civil War The United States also embarked on establishing a national bank with the First Bank of the United States in 1791 and the Second Bank of the United States in 1816. In 1836, President Andrew Jackson failed to extend the Second Bank's charter, reflecting his sentiments against banking institutions as well as his preference for the use of gold coins for large payments rather than privately issued banknotes. The return of gold could only be possible by reducing the dollar's gold equivalence, and in the Coinage Act of 1834 the gold–silver ratio was increased to 16.0 (ratio finalized in 1837 to 15.99 when the fine gold content of the $10 eagle was set at 232.2 grains or 15.0463 g). Gold discoveries in California in 1848 and later in Australia lowered the gold price relative to silver; this drove silver money from circulation because it was worth more in the market than as money. Passage of the Independent Treasury Act of 1848 placed the U.S. on a strict hard-money standard. Doing business with the American government required gold or silver coins. Government accounts were legally separated from the banking system. However, the mint ratio (the fixed exchange rate between gold and silver at the mint) continued to overvalue gold. In 1853, silver coins 50 cents and below were reduced in silver content and cannot be requested for minting by the general public (only the U.S. government can request for it). In 1857 the legal tender status of Spanish dollars and other foreign coinage was repealed. In 1857 the final crisis of the free banking era began as American banks suspended payment in silver, with ripples through the developing international financial system. Post-Civil War ran for president on the basis of the gold standard. Due to the inflationary finance measures undertaken to help pay for the U.S. Civil War, the government found it difficult to pay its obligations in gold or silver and suspended payments of obligations not legally specified in specie (gold bonds); this led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender. It was a fiat money (not convertible on demand at a fixed rate into specie). These notes came to be called "greenbacks". After the Civil War, Congress wanted to re-establish the metallic standard at pre-war rates. The market price of gold in greenbacks was above the pre-war fixed price ($20.67 per ounce of gold) requiring deflation to achieve the pre-war price. This was accomplished by growing the stock of money less rapidly than real output. By 1879 the market price of the greenback matched the mint price of gold, and according to Barry Eichengreen, the United States was effectively on the gold standard that year. The Coinage Act of 1873 (also known as the Crime of '73) suspended the minting of the standard silver dollar (of 412.5 grains, 90% fine), the only fully legal tender coin that individuals could convert silver bullion into in unlimited (or Free silver) quantities, and right at the onset of the silver rush from the Comstock Lode in the 1870s. Political agitation over the inability of silver miners to monetize their produce resulted in the Bland–Allison Act of 1878 and Sherman Silver Purchase Act of 1890 which made compulsory the minting of significant quantities of the silver Morgan dollar. With the resumption of convertibility on June 30, 1879, the government again paid its debts in gold, accepted greenbacks for customs and redeemed greenbacks on demand in gold. While greenbacks made suitable substitutes for gold coins, American implementation of the gold standard was hobbled by the continued over-issuance of silver dollars and silver certificates emanating from political pressures. Lack of public confidence in the ubiquitous silver currency resulted in a run on U.S. gold reserves during the Panic of 1893. During the latter part of the nineteenth century the use of silver and a return to the bimetallic standard were recurrent political issues, raised especially by William Jennings Bryan, the People's Party and the Free Silver movement. In 1900 the gold dollar was declared the standard unit of account and a gold reserve for government issued paper notes was established. Greenbacks, silver certificates, and silver dollars continued to be legal tender, all redeemable in gold. Fluctuations in the U.S. gold stock, 1862–1877 The U.S. had a gold stock of in 1862. Stocks rose to in 1866, declined in 1875 to and rose to in 1878. Net exports did not mirror that pattern. In the decade before the Civil War net exports were roughly constant; postwar they varied erratically around pre-war levels but fell significantly in 1877 and became negative in 1878 and 1879. The net import of gold meant that the foreign demand for American currency to purchase goods, services, and investments exceeded the corresponding American demands for foreign currencies. In the final years of the greenback period (1862–1879), gold production increased while gold exports decreased. The decrease in gold exports was considered by some to be a result of changing monetary conditions. The demands for gold during this period were as a speculative vehicle, and for its primary use in the foreign exchange markets financing international trade. The major effect of the increase in gold demand by the public and Treasury was to reduce exports of gold and increase the Greenback price of gold relative to purchasing power. ==Abandonment of the gold standard==

Impact of World War I Governments with insufficient tax revenue suspended convertibility repeatedly in the 19th century. The real test, however, came in the form of World War I, a test which "it failed utterly" according to economist Richard Lipsey. The gold specie standard came to an end in the United Kingdom and the rest of the British Empire with the outbreak of World War I. By the end of 1913, the classical gold standard was at its peak, but World War I caused many countries to suspend or abandon it. According to Lawrence Officer the main cause of the gold standard's failure to resume its previous position after World War I was "the Bank of England's precarious liquidity position and the gold-exchange standard". A run on sterling caused Britain to impose exchange controls that fatally weakened the standard; convertibility was not legally suspended, but gold prices no longer played the role that they did before. In financing the war and abandoning gold, many of the belligerents suffered drastic inflations. Price levels doubled in the U.S. and Britain, tripled in France and quadrupled in Italy. Exchange rates changed less, even though European inflation rates were more severe than America's. This meant that the costs of American goods decreased relative to those in Europe. Between August 1914 and spring of 1915, the dollar value of U.S. exports tripled, and its trade surplus exceeded $1 billion for the first time. Ultimately, the system could not deal quickly enough with the large deficits and surpluses; this was previously attributed to downward wage rigidity brought about by the advent of unionized labor but is now considered as an inherent fault of the system that arose under the pressures of war and rapid technological change. In any case, prices had not reached equilibrium by the time of the Great Depression, which served to kill off the system completely. For example, Germany had gone off the gold standard in 1914 and could not effectively return to it because war reparations had cost it much of its gold reserves. During the occupation of the Ruhr the German central bank (Reichsbank) issued enormous sums of non-convertible marks to support workers who were on strike against the French occupation and to buy foreign currency for reparations; this led to the German hyperinflation of the early 1920s and the impoverishment of the German middle class. The U.S. did not suspend the gold standard during the war. The new Federal Reserve intervened in currency markets and sold bonds to "sterilize" some of the gold imports that would have otherwise increased the stock of money. By 1927 many countries had returned to the gold standard. As a result of the World War the United States, which had been a net debtor country, had become a net creditor by 1919. Interwar period The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of World War I, when Treasury notes replaced the circulation of gold sovereigns and gold half sovereigns. Legally, the gold specie standard was not abolished. The end of the gold standard was implemented by the Bank of England through appeals to patriotism urging citizens not to redeem paper money for gold specie. It was only in 1925, when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended. The British '''''' introduced the gold bullion standard and simultaneously repealed the gold specie standard. The new standard ended the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price, but "only in the form of bars containing approximately four hundred ounces troy [12 kg] of fine gold". John Maynard Keynes, citing deflationary dangers, argued against resumption of the gold standard. By fixing the price at a level which restored the pre-war exchange rate of US$4.86 per pound sterling, as Chancellor of the Exchequer, Churchill is argued to have made an error that led to depression, unemployment and the 1926 general strike. The decision was described by Andrew Turnbull as a "historic mistake". The pound left the gold standard in 1931 and a number of currencies of countries that historically had performed a large amount of their trade in sterling were pegged to sterling instead of to gold. The Bank of England took the decision to leave the gold standard abruptly and unilaterally. Great Depression Many other countries followed Britain in returning to the gold standard, leading to a period of relative stability but also deflation. This state of affairs lasted until the Great Depression (1929–1939) forced countries off the gold standard. The British benefited from this departure. They could now use monetary policy to stimulate the economy. Australia and New Zealand had already left the standard and Canada quickly followed suit. The interwar partially backed gold standard was inherently unstable because of the conflict between the expansion of liabilities to foreign central banks and the resulting deterioration in the Bank of England's reserve ratio. France was then attempting to make Paris a world class financial center, and it received large gold flows as well. Upon taking office in March 1933, U.S. President Franklin D. Roosevelt departed from the gold standard. By the end of 1932, the gold standard had been abandoned as a global monetary system. • Trade-offs between currency stability and other domestic economic objectives: Governments in the 1920s and 1930s faced conflictual pressures between maintaining currency stability and reducing unemployment. Suffrage, trade unions, and labor parties pressured governments to focus on reducing unemployment rather than maintaining currency stability. • Increased risk of destabilizing capital flight: International finance doubted the credibility of national governments to maintain currency stability, which led to capital flight during crises, which aggravated the crises. • The U.S., not Britain, was the main financial center: Whereas Britain had during past periods been capable of managing a harmonious international monetary system, the U.S. was not. According to Douglas Irwin, the gold standard contributed to policymakers' turning to extreme protectionism in the 1930s. Policymakers were reluctant to abandon the gold standard, which would have allowed their currencies to depreciate. This instead led policymakers to impose higher tariffs and other protectionist measures. The Gold Standard and the Great Depression The Great Depression was an economic depression that started in 1929 and lasted for about a decade. Economists such as Barry Eichengreen, Peter Temin, and Ben Bernanke lay at least part of the blame on the gold standard of the 1920s. This view is based on two arguments: "(1) Under the gold standard, deflationary shocks were transmitted between countries and, (2) for most countries, continued adherence to gold prevented monetary authorities from offsetting banking panics and blocked their recoveries." A 2024 study in the American Economic Review found that for a sample of 27 countries, leaving the gold standard helped states to recover from the Great Depression. Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.S. banks. Commercial banks converted Federal Reserve Notes to gold in 1931, reducing its gold reserves and forcing a corresponding reduction in the amount of currency in circulation. This speculative attack created a panic in the U.S. banking system. Fearing imminent devaluation many depositors withdrew funds from U.S. banks. As bank runs grew, a reverse multiplier effect caused a contraction in the money supply. Additionally the New York Fed had loaned over in gold (over 240 tons) to European Central Banks. This transfer contracted the U.S. money supply. The foreign loans became questionable once Britain, Germany, Austria and other European countries went off the gold standard in 1931 and weakened confidence in the dollar. The forced contraction of the money supply resulted in deflation. Even as nominal interest rates dropped, deflation-adjusted real interest rates remained high, rewarding those who held onto money instead of spending it, further slowing the economy. Recovery in the United States was slower than in Britain, in part due to Congressional reluctance to abandon the gold standard and float the U.S. currency as Britain had done. In the early 1930s, the Federal Reserve defended the dollar by raising interest rates, trying to increase the demand for dollars. This helped attract international investors who bought foreign assets with gold. and the Imperial Preference policies of Great Britain, the failure of central banks to act responsibly, government policies designed to prevent wages from falling, such as the Davis–Bacon Act of 1931, during the deflationary period resulting in production costs dropping slower than sales prices, thereby injuring business profits and increases in taxes to reduce budget deficits and to support new programs such as Social Security. The U.S. top marginal income tax rate went from 25% to 63% in 1932 and to 79% in 1936, while the bottom rate increased over tenfold, from .375% in 1929 to 4% in 1932. The concurrent massive drought resulted in the U.S. Dust Bowl. The Austrian School argued that the Great Depression was the result of a credit bust. Alan Greenspan wrote that the bank failures of the 1930s were sparked by Great Britain dropping the gold standard in 1931. This act "tore asunder" any remaining confidence in the banking system. Financial historian Niall Ferguson wrote that what made the Great Depression truly 'great' was the European banking crisis of 1931. According to Federal Reserve Chairman Marriner Eccles, the root cause was the concentration of wealth resulting in a stagnating or decreasing standard of living for the poor and middle class. These classes went into debt, producing the credit explosion of the 1920s. Eventually, the debt load grew too heavy, resulting in the massive defaults and financial panics of the 1930s. Efforts to return to the Gold Standard During World War I many countries suspended their gold standard in varying ways. There was high inflation from WWI, and in the 1920s in the Weimar Republic, Austria, and throughout Europe. In the late 1920s there was a scramble to deflate prices to get the gold standard's conversion rates back on track to pre-WWI levels, by causing deflation and high unemployment through tight monetary policy. In 1933 FDR signed Executive Order 6102 and in 1934 signed the Gold Reserve Act. Bretton Woods Under the Bretton Woods international monetary agreement of 1944, the gold standard was kept without domestic convertibility. The role of gold was severely constrained, as other countries' currencies were fixed in terms of the dollar. Many countries kept reserves in gold and settled accounts in gold. Still, they preferred to settle balances with other currencies, with the US dollar becoming the favorite. The International Monetary Fund was established to help with the exchange process and assist nations in maintaining fixed rates. Within Bretton Woods adjustment was cushioned through credits that helped countries avoid deflation. Under the old standard, a country with an overvalued currency would lose gold and experience deflation until the currency was again valued correctly. Most countries defined their currencies in terms of dollars, but some countries imposed trading restrictions to protect reserves and exchange rates. Therefore, most countries' currencies were still basically inconvertible. In the late 1950s, the exchange restrictions were dropped and gold became an important element in international financial settlements. After the Second World War, a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange rate of per ounce; this option was not available to firms or individuals. All currencies pegged to the dollar thereby had a fixed value in terms of gold. Since private parties could not exchange gold at the official rate, market prices fluctuated. Large jumps in the market price 1960 lead to the creation of the London Gold Pool. Starting in the 1959–1969 administration of President Charles de Gaulle and continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing U.S. economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock"). This was meant to be a temporary measure, with the gold price of the dollar and the official rate of exchanges remaining constant. Revaluing currencies was the main purpose of this plan. No official revaluation or redemption occurred. The dollar subsequently floated. In December 1971, the "Smithsonian Agreement" was reached. In this agreement, the dollar was devalued from per troy ounce of gold to . Other countries' currencies appreciated. However, gold convertibility did not resume. In October 1973, the price was raised to . Once again, the devaluation was insufficient. Within two weeks of the second devaluation the dollar was left to float. The par value was made official in September 1973, long after it had been abandoned in practice. In October 1976, the government officially changed the definition of the dollar; references to gold were removed from statutes. From this point, the international monetary system was made of pure fiat money. However, gold has persisted as a significant reserve asset since the collapse of the classical gold standard. Modern gold production An estimated total of 174,100 tonnes of gold have been mined in human history, according to GFMS as of 2012. This is roughly equivalent to 5.6 billion troy ounces or, in terms of volume, about , or a cube on a side. There are varying estimates of the total volume of gold mined. One reason for the variance is that gold has been mined for thousands of years. Another reason is that some nations are not particularly open about how much gold is being mined. In addition, it is difficult to account for the gold output in illegal mining activities. World production for 2011 was circa 2,700 tonnes. Since the 1950s, annual gold output growth has approximately kept pace with world population growth (i.e. a doubling in this period) although it has lagged behind world economic growth (an approximately eightfold increase since the 1950s, and fourfold since 1980. ==Reintroduction==

In 2024, Zimbabwe became the first country in the 21st century to use a gold standard for its currency, in order to tackle inflation and create confidence within the economy. The Zimbabwe Gold (ZiG) is backed by US$400 million and 2,522 kg of gold, thus giving a total of US$575 million worth of hard assets. This development came after the Zimdollar crashed based on official rate from US$1:ZWL2.50 at introduction to US$1:ZWL30,672.42 on 5 April 2024, whilst parallel market was trading at US$1:ZWL42,500 at the time of removal. ==Theory==

Commodity money is inconvenient to store and transport in large amounts. Furthermore, it does not allow a government to manipulate the flow of commerce with the same ease that a fiat currency does. As such, commodity money gave way to representative money and gold and other specie were retained as its backing. Gold was a preferred form of money due to its rarity, durability, divisibility, fungibility and ease of identification, often in conjunction with silver. Silver was typically the main circulating medium, with gold as the monetary reserve. Commodity money was anonymous, as identifying marks can be removed. Commodity money retains its value despite what may happen to the monetary authority. After the fall of South Vietnam, many refugees carried their wealth to the West in gold after the national currency became worthless. Under commodity standards currency itself has no intrinsic value but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver. Representative money and the gold standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. Commodity money conversely led to deflation. Countries that left the gold standard earlier than other countries recovered from the Great Depression sooner. For example, Great Britain and the Scandinavian countries, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost entirely avoided the depression (due to the fact it was then barely integrated into the global economy). The connection between leaving the gold standard and the severity and duration of the depression was consistent for dozens of countries, including developing countries. This may explain why the experience and length of the depression differed between national economies. Variations A full or 100%-reserve gold standard exists when the monetary authority holds sufficient gold to convert all the circulating representative money into gold at the promised exchange rate. It is sometimes referred to as the gold specie standard to more easily distinguish it. Opponents of a full standard consider it difficult to implement, saying that the quantity of gold in the world is too small to sustain worldwide economic activity at or near current gold prices; implementation would entail a many-fold increase in the price of gold. Gold standard proponents have said, "Once a money is established, any stock of money becomes compatible with any amount of employment and real income." While prices would necessarily adjust to the supply of gold, the process may involve considerable economic disruption, as was experienced during earlier attempts to maintain gold standards. In an international gold-standard system (which is necessarily based on an internal gold standard in the countries concerned), gold or a currency that is convertible into gold at a fixed price is used to make international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold, inflows or outflows occur until rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. == Impact ==

A poll of 39 prominent U.S. economists conducted by the IGM Economic Experts Panel in 2012 found that none of them believed that returning to the gold standard would improve price-stability and employment outcomes. The specific statement with which the economists were asked to agree or disagree was: "If the U.S. replaced its discretionary monetary policy regime with a gold standard, defining a 'dollar' as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American." 40% of the economists disagreed, and 53% strongly disagreed with the statement; the rest did not respond to the question. The panel of polled economists included past Nobel Prize winners, former economic advisers to both Republican and Democratic presidents, and senior faculty from Harvard, Chicago, Stanford, MIT, and other well-known research universities. A 1995 study reported on survey results among economic historians showing that two-thirds of economic historians disagreed that the gold standard "was effective in stabilizing prices and moderating business-cycle fluctuations during the nineteenth century." Advantages According to economist Michael D. Bordo, the gold standard has three benefits: "its record as a stable nominal anchor; its automaticity; and its role as a credible commitment mechanism": • A gold standard does not allow some types of financial repression. Financial repression acts as a mechanism to transfer wealth from creditors to debtors, particularly the governments that practice it. Financial repression is most successful in reducing debt when accompanied by inflation and can be considered a form of taxation. In 1966 Alan Greenspan wrote "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." • Long-term price stability has been described as one of the virtues of the gold standard, but historical data shows that the magnitude of short run swings in prices were far higher under the gold standard. • Currency crises were less frequent under the gold standard than in periods without the gold standard. Gold used to pay for imports reduces the money supply of importing nations, causing deflation, which makes them more competitive, while the importation of gold by net exporters serves to increase their money supply, causing inflation, making them less competitive. • Hyper-inflation, a common correlator with government overthrows and economic failures, is more difficult when a gold standard exists. This is because hyper-inflation, by definition, is a loss in trust of failing fiat and those governments that create the fiat. Disadvantages • The unequal distribution of gold deposits makes the gold standard more advantageous for those countries that produce gold. In 2010 the largest producers of gold, in order, were China, Australia, the U.S., South Africa, and Russia. The country with the largest unmined gold deposits is Australia. • Some economists believe that the gold standard acts as a limit on economic growth. According to David Mayer, "As an economy's productive capacity grows, then so should its money supply. Because a gold standard requires that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow." • Mainstream economists believe that economic recessions can be largely mitigated by increasing the money supply during economic downturns. A gold standard means that the money supply would be determined by the gold supply and hence monetary policy could no longer be used to stabilize the economy. • Although the gold standard brings long-run price stability, it is historically associated with high short-run price volatility. It has been argued by Schwartz, among others, that instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt. Historically, discoveries of gold and rapid increases in gold production have caused volatility. • Deflation punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of the additional wealth, reducing GDP. • The money supply would essentially be determined by the rate of gold production. When gold stocks increase more rapidly than the economy, there is inflation and the reverse is also true. The consensus view is that the gold standard contributed to the severity and length of the Great Depression, as under the gold standard central banks could not expand credit at a fast enough rate to offset deflationary forces. • Hamilton contended that the gold standard is susceptible to speculative attacks when a government's financial position appears weak. Conversely, this threat discourages governments from engaging in risky policy . For example, the U.S. was forced to contract the money supply and raise interest rates in September 1931 to defend the dollar after speculators forced the UK off the gold standard. • Devaluing a currency under a gold standard would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation. • Most economists favor a low, positive rate of inflation of around 2%. This reflects fear of deflationary shocks and the belief that active monetary policy can dampen fluctuations in output and unemployment. Inflation gives them room to tighten policy without inducing deflation. • A gold standard provides practical constraints against the measures that central banks might otherwise use to respond to economic crises. Creation of new money reduces interest rates and thereby increases demand for new lower cost debt, raising the demand for money. • The late emergence of the gold standard may in part have been a consequence of its higher value than other metals, which made it unpractical for most laborers to use in everyday transactions (relative to less valuable silver coins). ==Advocates==

A return to the gold standard was considered by the U.S. Gold Commission in 1982 but found only minority support. In 2001 Malaysian Prime Minister Mahathir Mohamad proposed a new currency that would be used initially for international trade among Muslim nations, using a modern Islamic gold dinar, defined as 4.25 grams of pure (24-carat) gold. Mahathir claimed it would be a stable unit of account and a political symbol of unity between Islamic nations. This would purportedly reduce dependence on the U.S. dollar and establish a non-debt-backed currency in accord with Sharia law that prohibited the charging of interest. However, this proposal has not been taken up, and the global monetary system continues to rely on the U.S. dollar as the main trading and reserve currency. Former U.S. Federal Reserve Chairman Alan Greenspan acknowledged he was one of "a small minority" within the central bank that had some positive view on the gold standard. In a 1966 essay he contributed to a book by Ayn Rand, titled Gold and Economic Freedom, Greenspan argued the case for returning to a 'pure' gold standard; in that essay he described supporters of fiat currencies as "welfare statists" intending to use monetary policy to finance deficit spending. More recently he claimed that by focusing on targeting inflation "central bankers have behaved as though we were on the gold standard", rendering a return to the standard unnecessary. Similarly, economists like Robert Barro argued that whilst some form of "monetary constitution" is essential for stable, depoliticized monetary policy, the form this constitution takes – for example, a gold standard, some other commodity-based standard, or a fiat currency with fixed rules for determining the quantity of money – is considerably less important. The gold standard is supported by many followers of the Austrian School of economics, free-market libertarians, and some supply-siders. U.S. politics Former congressman Ron Paul is a long-term, high-profile advocate of a gold standard, but has also expressed support for using a standard based on a basket of commodities that better reflects the state of the economy. In 2011 the Utah legislature passed a bill to accept federally issued gold and silver coins as legal tender to pay taxes. As federally issued currency, the coins were already legal tender for taxes, although the market price of their metal content currently exceeds their monetary value. As of 2011 similar legislation was under consideration in other U.S. states. The bill was initiated by newly elected Republican Party legislators associated with the Tea Party movement and was driven by anxiety over the policies of President Barack Obama. In 2013, the Arizona Legislature passed SB 1439, which would have made gold and silver coin a legal tender in payment of debt, but the bill was vetoed by the Governor. In 2015, some Republican candidates for the 2016 presidential election advocated for a gold standard, based on concern that the Federal Reserve's attempts to increase economic growth may create inflation. Economic historians did not agree with the candidates' assertions that the gold standard would benefit the U.S. economy. In 2025, Florida passed a law making gold and silver legal tender within the state to, as Governor Ron DeSantis put it, give people "financial freedom". ==See also==