The coming of the gold standard
The demonetization of silver and the establishment of gold monometallism was the outcome of deliberate government interference with monetary matters. It was not the intention of the governments to establish the gold standard. They aimed at a double standard, to substitute a rigid, government-decreed exchange ratio between gold and silver for the fluctuating market ratios between the independently coexistent gold and silver coins. These attempts failed lamentably. It was this failure that generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines.
In the 17th century, the rates at which the English government tariffed the coins overvalued the guinea with regard to silver and thus made the silver coins disappear. Only those silver coins that were much worn by usage or in any other way defaced or reduced in weight remained in current use; it did not pay to export and to sell them on the bullion market. Thus England got the gold standard against the intention of its government. Only much later the laws made the de facto gold standard a de jure standard. The government abandoned further attempts to pump silver standard coins into the market and minted silver only as subsidiary coins. Their exchange value depended not on their silver content, but on the fact that they could be exchanged at every instant, without delay and without cost, at their full face value against gold. They were de facto silver printed notes, claims against a definite amount of gold.
Gold was legal tender in Great Britain since 1821 (when the Bank of England resumed redemption of its notes) and the de facto currency in the US since 1834. Australia and Canada followed 20 years later. The breakthrough for gold and the era of the classic gold standard began after the war between France and Germany (1870-1871). The German government received war damages of 5 billion francs in gold and made it fiat currency instead of silver, that was losing popularity at the time. The Prussian Bank ('Preusische Bank') was turned into a central bank ('Reichsbank'). Its notes became legal tender in 1909, following the example of the British system.
There were several reasons for using gold. Great Britain, with the largest capital market in the world, was using it. Several major lands using silver (Russia, Austria) have suspended payments by the time. Finally, silver has less purchasing power than gold, making its weight for large transfers rather problematic. Practically all western lands and many of their colonies have followed suit. The bimetallic standard of France and in the other countries of the Latin Monetary Union resulted in the emergence of de facto gold monometallism as well.
Types of gold standard
Under the classical gold standard, each central bank was responsible for making sure that its notes could be redeemed into gold. The central banks of Great Britain, France, Germany, Switzerland, and Belgium (and later of the U.S.) kept their entire reserves in gold. These reserves were supposed to be large enough for them to survive emergency situations.
But commercial banks usually kept most of their reserves in the form of central banknotes and only held extremely low gold reserves for emergency situations. In some countries, this practice predated the classical gold standard by quite a few decades. For example, it was already the practice of the English country banks in the first half of the nineteenth century. They kept Bank of England notes as part of their reserves and, in times of great strain on their gold reserves, often redeemed their own notes, not into gold, but into notes of the Bank.
Many central banks adopted exactly the same scheme. The central banks of Russia, Austria-Hungary, Japan, the Netherlands, and of the Scandinavian countries, as well as the central banks of British dominions such as South Africa and Australia redeemed their own notes not only in gold, but also in notes of the more important foreign central banks. Countries such as India, the Philippines, and various Latin American countries held their reserves exclusively under the form of foreign gold-denominated banknotes. The pooling of gold reserves in a few reliable central banks allows a larger inflation of the worldwide note supply than would otherwise have been possible. The pitfall is that it places the entire responsibility of keeping sufficiently large reserves on a small number of "virtuous" fractional-reserve banks. They have a reason to accept this burden, however, because it gives them political power over the other banks, especially in times of crises.
The gold exchange standard elevated this practice of coordinated inflation into a principle of international monetary relations. The American Fed and the Bank of England would be the central banks of the entire world (with a few exceptions, notably France). These central banks would inflate relatively slowly; but would be repaid in terms of political power. All other national central banks should keep a more or less large part of their reserves in the form of U.S. dollar notes and British pound notes and could inflate much more.
Designed from the beginning to facilitate inflation, the unstable system lasted only six years (1925-31). The Great Depression of 1929 caused a rise of protectionist policies and foreign exchange controls, that choked the international currency trade. The Bank of England could not renew its gold reserves and suspended its payments, followed by other banks. From then on currencies fluctuated freely, which lasted until the end of World War II.
Under the gold bullion standard, the currency was no longer redeemable in coins; it could only be redeemed in large, highly valuable, gold bars. This, in effect, limited gold redemption to a handful of specialists in foreign trade. No longer a true gold standard, the governments can still proclaim their adherence to gold. The European "gold standards" of the 1920s were pseudo-standards of this type. For example, in 1925-1931 the Bank of England was on the bullion standard and would sell gold bars only in the minimum amount of 400 fine (pure) ounces.
In the flexible standard, the parity with gold is not fixed by law but is subject to instant change upon the order of some specified governmental agency. Under this standard, the movement of the unit's parity is almost always downward, since the primary purpose for adopting it is to hide or counteract the undesired ultimate effects of prior interventions.
The Gold Standard Vs Free Market Money
Most of the times when people who are in favour of a gold standard use the term 'Gold standard' they are in fact referring to the system of free market money, Or simply allowing people to choose whatever currency they to use for trade. The main reason the term gold standard is used as shorthand is due to gold being used throughout history as the most popular commodity that people use as currencies when they are free to choose.
- History of money and banking
- Money creation
- Monetary reform
- The Gold Standard: Perspectives in the Austrian School
- The Ethics of Money Production
- The Case for Gold
- The Case for a Genuine Gold Dollar
- The Case for a 100 Percent Gold Dollar
- What Has Government Done to Our Money?
- Ludwig von Mises. "The Specific Value of Money", online version of Human Action, referenced 2010-05-23.
- Ludwig von Mises. "19. The Gold Standard ", online version of Human Action, referenced 2010-05-23.
- Bank of England. "1821: End of the Restriction Period", Bank of England Museum, referenced 2010-05-23.
- Jörg Guido Hülsmann. "The Ethics of Money Production" (pdf), online version, Chapter 16. International Banking Systems, 1871–1971, p.214-216, referenced 2010-05-23.
- Murray N. Rothbard. "What Has Government Done to Our Money?", online version, Going off the Gold Standard, referenced 2010-05-25.
- Lawrence H. Officer, University of Illinois at Chicago. "Gold Standard", Encyclopedia of Economic and Business History, referenced 2010-05-26.
- Percy L. Greaves, Jr. "Mises Made Easier ", 1974. Referenced 2014-07-12.
- Gold standard at Wikipedia
- Gold Standard by Michael D. Bordo at The Concise Encyclopedia of Economics
- Gold standard on the Encyclopedia of Economic and Business History, with numerous countries and dates on the gold standard
- The Gold Standard, An Austrian Perspective Ludwig von Mises Institute seminar, November 1983 (YouTube)
- Seminar on Money and Government Ludwig von Mises Institute seminar, October 1984
- The Gold Standard Revisited Ludwig von Mises Institute seminar, November 2008 (YouTube)
- Money and the Federal Reserve Ludwig von Mises Institute seminar, May 1992 (YouTube)
- Money, Banking, and the New World Order Ludwig von Mises Institute seminar, September 1999 (YouTube)