Internationally, completely
free import and export of gold was included with all balance-of-payments deficits
settled in the metal. The gold standard was supposed to discipline an economy.
Gold flowed out of a country in deficit, leaving less for internal circulation,
thus controlling prices and making exports more competitive. Equally, a country
in surplus imported gold and its economy expanded.
Britain went on to an unofficial
gold standard in 1717 when Sir Isaac Newton, then Master of the Mint, established
a fixed price of £3.17.10
½d per standard (22 carat) troy
ounce, equal to £4.4.11 ½d per fine ounce.
Although silver, which had previously formed the major circulation in the country,
was not officially demonetized, it circulated
little after that. Britain adopted a formal gold standard in 1821 at the end
of the Napoleonic wars, after the introduction of the Sovereign
as the main circulating coin.
The rest of Europe, however,
remained on a silver standard until the 1870s, when the great flows of gold
available from the United States and Australian discoveries made it practical
for it to be adopted as the main metal circulating. Germany switched to gold
in 1871, Scandinavia in 1874, the Netherlands in 1875, France and Spain in 1876
and Russia in 1893.
The United States remained
on a bimetallic system of gold and silver until 1900 when the Gold Standard
Act confirmed the supremacy of gold. Eventually fifty-nine countries were on
the gold standard, with China on silver as the only main exception.
Its heyday was short. At
the onset of World War I in 1914, most countries suspended gold payments, preferring
to husband their reserves for essential war needs. Many never returned. Britain
went off the gold standard in 1919. Although attempts were made to revive the
gold standard during the 1920s, gold coin circulation was limited and many central
banks began to keep part of their reserves in key currencies, such as sterling
or dollars, which they could still exchange
for gold. Thus the gold exchange standard was born.
Britain went on the gold
bullion standard in 1926, which had a fixed
gold price (still £4.4.11 ½d per troy ounce,
as in 1717) but notes were not convertible into gold coin and could be exchanged
only for 400 ounce good
delivery bars. Britain went off this standard in 1931 and most European
countries followed suit in the early 1930s.
The United States went off
gold in March 1933, when private holding and export were forbidden. Only the
export of gold to recognized central banks and governments was permitted. This
created the dollar-gold exchange standard under which dollars could be traded
for gold at the Federal Reserve. This system was confirmed by the Bretton Woods
Agreement in 1944 and lasted until 1971.
Gold Standard
The monetary system with
a fixed price for gold and with gold coin either forming the whole circulation
of currency within a country or with notes representing and redeemable in gold
has always been known as ‘the gold standard’.