Isaac Newton, as Master of the Mint, set the silver price of the guinea in 1717 and put Britain on metal by accident (1717)
The ratio overvalued gold, driving silver out of circulation; Britain adopted the arrangement formally in 1821
General knowledge · Economics & society
The gold standard
Classical era c. 1870–1914; finally abandoned 1971
Economics — money anchored to metal
The monetary system in which a currency's value is fixed in terms of a stated weight of gold, and notes are in principle convertible into the metal on demand. Britain drifted onto it after Isaac Newton, as Master of the Mint, set the coinage ratio in 1717, and adopted it formally in 1821; most of the industrial world followed between 1870 and 1900. The system delivered stable exchange rates and long-run price stability at the cost of surrendering control over domestic demand, which is why it broke in the First World War, broke again in the Depression, and has never been restored. Its modern defenders value the discipline; most economists regard the constraint as the reason the Depression was as deep and as long as it was.
How to spot them
- ▸Isaac Newton at the Royal Mint in 1717, and Britain's formal adoption in 1821
- ▸William Jennings Bryan at the 1896 Democratic convention, and a crucifixion metaphor
- ▸Churchill as Chancellor in 1925, and a Keynes pamphlet attacking him for it
- ▸Thirty-five dollars an ounce, and a window closed in August 1971
Key facts
'You shall not crucify mankind upon a cross of gold' — Chicago, 9 July 1896 (1896)
William Jennings Bryan's speech to the Democratic convention, arguing for the free coinage of silver
Churchill's 1925 budget restored the pre-war parity of $4.86, and Keynes wrote a pamphlet naming him in the title (1925)
The Economic Consequences of Mr Churchill; the overvalued pound contributed to the General Strike of 1926
Britain suspended convertibility on 21 September 1931, and never went back (1931)
Forced off by the crisis that brought down the second Labour government and created the National Government
Executive Order 6102 of 1933 required Americans to hand in their bullion and coin (1933)
Roosevelt; the following year's Gold Reserve Act revalued the dollar at $35 an ounce
Nixon's televised announcement of 15 August 1971 ended dollar convertibility (1971)
The 'Nixon shock', which finished off the postwar fixed-rate system
Keynes's 1923 dismissal of it as 'a barbarous relic' (1923)
From A Tract on Monetary Reform
Barry Eichengreen's Golden Fetters, arguing the countries that left earliest recovered earliest from the Depression (1992)
The standard modern account of why the system deepened the slump
Key ideas
- The price-specie flow mechanism, described by David Hume in 1752: a country running a deficit loses metal, its prices fall, its exports become competitive, and the balance corrects itself — automatically, but through domestic deflation.
- The trilemma: a country can have any two of fixed exchange rates, free capital movement and an independent monetary policy, never all three. Under a metallic standard, the third is what is given up.
- The case for it is a hard constraint on governments tempted to inflate; the case against is that the constraint bites hardest exactly when an economy most needs looser money.
Quick-fire facts
- •Isaac Newton was Warden and then Master of the Royal Mint from 1696 until his death in 1727
- •Britain adopted the standard formally in 1821, after the Bank Restriction period of 1797–1821
- •The United States moved fully to it under the Gold Standard Act of 1900, after the disputes of the 1870s and 1890s
- •William Jennings Bryan's 'Cross of Gold' speech was delivered at the Democratic National Convention in Chicago on 9 July 1896
- •Winston Churchill, as Chancellor of the Exchequer, returned sterling to the pre-war parity of $4.86 in April 1925
- •Keynes's attack, The Economic Consequences of Mr Churchill, appeared later in 1925
- •Britain left on 21 September 1931; the Labour Chancellor Philip Snowden had been told repeatedly it was impossible
- •Franklin Roosevelt's Executive Order 6102 of April 1933 required Americans to surrender their bullion; the Gold Reserve Act of 1934 set the price at $35 an ounce
- •Richard Nixon suspended the dollar's convertibility on 15 August 1971 — the 'Nixon shock'
- •Keynes called it 'a barbarous relic' in A Tract on Monetary Reform (1923)
- •The economic historian Hugh Rockoff argued in 1990 that The Wonderful Wizard of Oz can be read as a monetary allegory — an entertaining theory that Baum scholars largely reject
Drill it — 8 cards
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Sources
- Barry Eichengreen — Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 1992
- John Maynard Keynes — A Tract on Monetary Reform 1923