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Gold Standard

Lawrence H. Officer, University of Illinois at Chicago

The gold standard is the most famous monetary system that ever existed. The periods in which the gold standard flourished, the groupings of countries under the gold standard, and the dates during which individual countries adhered to this standard are delineated in the first section. Then characteristics of the gold standard (what elements make for a gold standard), the various types of the standard (domestic versus international, coin versus other, legal versus effective), and implications for the money supply of a country on the standard are outlined. The longest section is devoted to the “classical” gold standard, the predominant monetary system that ended in 1914 (when World War I began), followed by a section on the “interwar” gold standard, which operated between the two World Wars (the 1920s and 1930s).

Countries and Dates on the Gold Standard

Countries on the gold standard and the periods (or beginning and ending dates) during which they were on gold are listed in Tables 1 and 2 for the classical and interwar gold standards. Types of gold standard, ambiguities of dates, and individual-country cases are considered in later sections. The country groupings reflect the importance of countries to establishment and maintenance of the standard. Center countries — Britain in the classical standard, the United Kingdom (Britain’s legal name since 1922) and the United States in the interwar period — were indispensable to the spread and functioning of the gold standard. Along with the other core countries — France and Germany, and the United States in the classical period — they attracted other countries to adopt the gold standard, in particular, British colonies and dominions, Western European countries, and Scandinavia. Other countries — and, for some purposes, also British colonies and dominions — were in the periphery: acted on, rather than actors, in the gold-standard eras, and generally not as committed to the gold standard.

Table 1Countries on Classical Gold Standard
Country Type of Gold Standard Period
Center Country
Britaina Coin 1774-1797b, 1821-1914
Other Core Countries
United Statesc Coin 1879-1917d
Francee Coin 1878-1914
Germany Coin 1871-1914
British Colonies and Dominions
Australia Coin 1852-1915
Canadaf Coin 1854-1914
Ceylon Coin 1901-1914
Indiag Exchange (British pound) 1898-1914
Western Europe
Austria-Hungaryh Coin 1892-1914
Belgiumi Coin 1878-1914
Italy Coin 1884-1894
Liechtenstein Coin 1898-1914
Netherlandsj Coin 1875-1914
Portugalk Coin 1854-1891
Switzerland Coin 1878-1914
Denmarkl Coin 1872-1914
Finland Coin 1877-1914
Norway Coin 1875-1914
Sweden Coin 1873-1914
Eastern Europe
Bulgaria Coin 1906-1914
Greece Coin 1885, 1910-1914
Montenegro Coin 1911-1914
Romania Coin 1890-1914
Russia Coin 1897-1914
Middle East
Egypt Coin 1885-1914
Turkey (Ottoman Empire) Coin 1881m-1914
Japann Coin 1897-1917
Philippines Exchange (U.S. dollar) 1903-1914
Siam Exchange (British pound) 1908-1914
Straits Settlementso Exchange (British pound) 1906-1914
Mexico and Central America
Costa Rica Coin 1896-1914
Mexico Coin 1905-1913
South America
Argentina Coin 1867-1876, 1883-1885, 1900-1914
Bolivia Coin 1908-1914
Brazil Coin 1888-1889, 1906-1914
Chile Coin 1895-1898
Ecuador Coin 1898-1914
Peru Coin 1901-1914
Uruguay Coin 1876-1914
Eritrea Exchange (Italian lira) 1890-1914
German East Africa Exchange (German mark) 1885p-1914
Italian Somaliland Exchange (Italian lira) 1889p-1914

a Including colonies (except British Honduras) and possessions without a national currency: New Zealand and certain other Oceanic colonies, South Africa, Guernsey, Jersey, Malta, Gibraltar, Cyprus, Bermuda, British West Indies, British Guiana, British Somaliland, Falkland Islands, other South and West African colonies.
b Or perhaps 1798.
c Including countries and territories with U.S. dollar as exclusive or predominant currency: British Honduras (from 1894), Cuba (from 1898), Dominican Republic (from 1901), Panama (from 1904), Puerto Rico (from 1900), Alaska, Aleutian Islands, Hawaii, Midway Islands (from 1898), Wake Island, Guam, and American Samoa.
d Except August – October 1914.
e Including Tunisia (from 1891) and all other colonies except Indochina.
f Including Newfoundland (from 1895).
g Including British East Africa, Uganda, Zanzibar, Mauritius, and Ceylon (to 1901).
h Including Montenegro (to 1911).
I Including Belgian Congo.
j Including Netherlands East Indies.
k Including colonies, except Portuguese India.
l Including Greenland and Iceland.
m Or perhaps 1883.
n Including Korea and Taiwan.
o Including Borneo.
p Approximate beginning date.

Sources: Bloomfield (1959, pp. 13, 15; 1963), Bordo and Kydland (1995), Bordo and Schwartz (1996), Brown (1940, pp.15-16), Bureau of the Mint (1929), de Cecco (1984, p. 59), Ding (1967, pp. 6- 7), Director of the Mint (1913, 1917), Ford (1985, p. 153), Gallarotti (1995, pp. 272 75), Gunasekera (1962), Hawtrey (1950, p. 361), Hershlag (1980, p. 62), Ingram (1971, p. 153), Kemmerer (1916; 1940, pp. 9-10; 1944, p. 39), Kindleberger (1984, pp. 59-60), Lampe (1986, p. 34), MacKay (1946, p. 64), MacLeod (1994, p. 13), Norman (1892, pp. 83-84), Officer (1996, chs. 3 4), Pamuk (2000, p. 217), Powell (1999, p. 14), Rifaat (1935, pp. 47, 54), Shinjo (1962, pp. 81-83), Spalding (1928), Wallich (1950, pp. 32-36), Yeager (1976, p. 298), Young (1925).

Table 2Countries on Interwar Gold Standard
Country Type ofGold Standard Ending Date
Exchange-RateStabilization CurrencyConvertibilitya
United Kingdomb 1925 1931
Coin 1922e Other Core Countries
Bullion 1928 Germany 1924 1931
Australiag 1925 1930
Exchange 1925 Canadai 1925 1929
Exchange 1925 Indiaj 1925 1931
Coin 1929k South Africa 1925 1933
Austria 1922 1931
Exchange 1926 Danzig 1925 1935
Coin 1925 Italym 1927 1934
Coin 1925 Portugalo 1929 1931
Coin 1925 Scandinavia
Bullion 1927 Finland 1925 1931
Bullion 1928 Sweden 1922 1931
Albania 1922 1939
Exchange 1927 Czechoslovakia 1923 1931
Exchange 1928 Greece 1927 1932
Exchange 1925 Latvia 1922 1931
Coin 1922 Poland 1926 1936
Exchange 1929 Yugoslavia 1925 1932
Egypt 1925 1931
Exchange 1925 Palestine 1927 1931
Exchange 1928 Asia
Coin 1930 Malayat 1925 1931
Coin 1925 Philippines 1922 1933
Exchange 1928 Mexico and Central America
Exchange 1922 Guatemala 1925 1933
Exchange 1922 Honduras 1923 1933
Coin 1925 Nicaragua 1915 1932
Coin 1920 South America
Coin 1927 Bolivia 1926 1931
Exchange 1928 Chile 1925 1931
Coin 1923 Ecuador 1927 1932
Exchange 1927 Peru 1928 1932
Exchange 1928 Venezuela 1923 1930

a And freedom of gold export and import.
b Including colonies (except British Honduras) and possessions without a national currency: Guernsey, Jersey, Malta, Gibraltar, Cyprus, Bermuda, British West Indies, British Guiana, British Somaliland, Falkland Islands, British West African and certain South African colonies, certain Oceanic colonies.
cIncluding countries and territories with U.S. dollar as exclusive or predominant currency: British Honduras, Cuba, Dominican Republic, Panama, Puerto Rico, Alaska, Aleutian Islands, Hawaii, Midway Islands, Wake Island, Guam, and American Samoa.
dNot applicable; “the United States dollar…constituted the central point of reference in the whole post-war stabilization effort and was throughout the period of stabilization at par with gold.” — Brown (1940, p. 394)
e1919 for freedom of gold export.
f Including colonies and possessions, except Indochina and Syria.
g Including Papua (New Guinea) and adjoining islands.
h Kenya, Uganda, and Tanganyika.
I Including Newfoundland.
j Including Bhutan, Nepal, British Swaziland, Mauritius, Pemba Island, and Zanzibar.
k 1925 for freedom of gold export.
l Including Luxemburg and Belgian Congo.
m Including Italian Somaliland and Tripoli.
n Including Dutch Guiana and Curacao (Netherlands Antilles).
o Including territories, except Portuguese India.
p Including Liechtenstein.
q Including Greenland and Iceland.
r Including Greater Lebanon.
s Including Korea and Taiwan.
t Including Straits Settlements, Sarawak, Labuan, and Borneo.

Sources: Bett (1957, p. 36), Brown (1940), Bureau of the Mint (1929), Ding (1967, pp. 6-7), Director of the Mint (1917), dos Santos (1996, pp. 191-92), Eichengreen (1992, p. 299), Federal Reserve Bulletin (1928, pp. 562, 847; 1929, pp. 201, 265, 549; 1930, pp. 72, 440; 1931, p. 554; 1935, p. 290; 1936, pp. 322, 760), Gunasekera (1962), Jonung (1984, p. 361), Kemmerer (1954, pp. 301 302), League of Nations (1926, pp. 7, 15; 1927, pp. 165-69; 1929, pp. 208-13; 1931, pp. 265-69; 1937/38, p. 107; 1946, p. 2), Moggridge (1989, p. 305), Officer (1996, chs. 3-4), Powell (1999, pp. 23-24), Spalding (1928), Wallich (1950, pp. 32-37), Yeager (1976, pp. 330, 344, 359); Young (1925, p. 76).

Characteristics of Gold Standards

Types of Gold Standards

Pure Coin and Mixed Standards

In theory, “domestic” gold standards — those that do not depend on interaction with other countries — are of two types: “pure coin” standard and “mixed” (meaning coin and paper, but also called simply “coin”) standard. The two systems share several properties. (1) There is a well-defined and fixed gold content of the domestic monetary unit. For example, the dollar is defined as a specified weight of pure gold. (2) Gold coin circulates as money with unlimited legal-tender power (meaning it is a compulsorily acceptable means of payment of any amount in any transaction or obligation). (3) Privately owned bullion (gold in mass, foreign coin considered as mass, or gold in the form of bars) is convertible into gold coin in unlimited amounts at the government mint or at the central bank, and at the “mint price” (of gold, the inverse of the gold content of the monetary unit). (4) Private parties have no restriction on their holding or use of gold (except possibly that privately created coined money may be prohibited); in particular, they may melt coin into bullion. The effect is as if coin were sold to the monetary authority (central bank or Treasury acting as a central bank) for bullion. It would make sense for the authority to sell gold bars directly for coin, even though not legally required, thus saving the cost of coining. Conditions (3) and (4) commit the monetary authority in effect to transact in coin and bullion in each direction such that the mint price, or gold content of the monetary unit, governs in the marketplace.

Under a pure coin standard, gold is the only money. Under a mixed standard, there are also paper currency (notes) — issued by the government, central bank, or commercial banks — and demand-deposit liabilities of banks. Government or central-bank notes (and central-bank deposit liabilities) are directly convertible into gold coin at the fixed established price on demand. Commercial-bank notes and demand deposits might be converted not directly into gold but rather into gold-convertible government or central-bank currency. This indirect convertibility of commercial-bank liabilities would apply certainly if the government or central- bank currency were legal tender but also generally even if it were not. As legal tender, gold coin is always exchangeable for paper currency or deposits at the mint price, and usually the monetary authority would provide gold bars for its coin. Again, two-way transactions in unlimited amounts fix the currency price of gold at the mint price. The credibility of the monetary-authority commitment to a fixed price of gold is the essence of a successful, ongoing gold-standard regime.

A pure coin standard did not exist in any country during the gold-standard periods. Indeed, over time, gold coin declined from about one-fifth of the world money supply in 1800 (2/3 for gold and silver coin together, as silver was then the predominant monetary standard) to 17 percent in 1885 (1/3 for gold and silver, for an eleven-major-country aggregate), 10 percent in 1913 (15 percent for gold and silver, for the major-country aggregate), and essentially zero in 1928 for the major-country aggregate (Triffin, 1964, pp. 15, 56). See Table 3. The zero figure means not that gold coin did not exist, rather that its main use was as reserves for Treasuries, central banks, and (generally to a lesser extent) commercial banks.

Table 3Structure of Money: Major-Countries Aggregatea(end of year)
1885 1928
8 50
33 0d
18 21
33 99

a Core countries: Britain, United States, France, Germany. Western Europe: Belgium, Italy, Netherlands, Switzerland. Other countries: Canada, Japan, Sweden.
b Metallic money, minor coin, paper currency, and demand deposits.
c 1885: Gold and silver coin; overestimate, as includes commercial-bank holdings that could not be isolated from coin held outside banks by the public. 1913: Gold and silver coin. 1928: Gold coin.
d Less than 0.5 percent.
e 1885 and 1913: Gold, silver, and foreign exchange. 1928: Gold and foreign exchange.
f Official gold: Gold in official reserves. Money gold: Gold-coin component of money supply.

Sources: Triffin (1964, p. 62), Sayers (1976, pp. 348, 352) for 1928 Bank of England dollar reserves (dated January 2, 1929).

An “international” gold standard, which naturally requires that more than one country be on gold, requires in addition freedom both of international gold flows (private parties are permitted to import or export gold without restriction) and of foreign-exchange transactions (an absence of exchange control). Then the fixed mint prices of any two countries on the gold standard imply a fixed exchange rate (“mint parity”) between the countries’ currencies. For example, the dollar- sterling mint parity was $4.8665635 per pound sterling (the British pound).

Gold-Bullion and Gold-Exchange Standards

In principle, a country can choose among four kinds of international gold standards — the pure coin and mixed standards, already mentioned, a gold-bullion standard, and a gold- exchange standard. Under a gold-bullion standard, gold coin neither circulates as money nor is it used as commercial-bank reserves, and the government does not coin gold. The monetary authority (Treasury or central bank) stands ready to transact with private parties, buying or selling gold bars (usable only for import or export, not as domestic currency) for its notes, and generally a minimum size of transaction is specified. 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, approximately £1699 or $8269. Finally, the monetary authority of a country on a gold-exchange standard buys and sells not gold in any form but rather gold- convertible foreign exchange, that is, the currency of a country that itself is on the gold coin or bullion standard.

Gold Points and Gold Export/Import

A fixed exchange rate (the mint parity) for two countries on the gold standard is an oversimplification that is often made but is misleading. There are costs of importing or exporting gold. These costs include freight, insurance, handling (packing and cartage), interest on money committed to the transaction, risk premium (compensation for risk), normal profit, any deviation of purchase or sale price from the mint price, possibly mint charges, and possibly abrasion (wearing out or removal of gold content of coin — should the coin be sold abroad by weight or as bullion). Expressing the exporting costs as the percent of the amount invested (or, equivalently, as percent of parity), the product of 1/100th of these costs and mint parity (the number of units of domestic currency per unit of foreign currency) is added to mint parity to obtain the gold-export point — the exchange rate at which gold is exported. To obtain the gold-import point, the product of 1/100th of the importing costs and mint parity is subtracted from mint parity.

If the exchange rate is greater than the gold-export point, private-sector “gold-point arbitrageurs” export gold, thereby obtaining foreign currency. Conversely, for the exchange rate less than the gold-import point, gold is imported and foreign currency relinquished. Usually the gold is, directly or indirectly, purchased from the monetary authority of the one country and sold to the monetary authority in the other. The domestic-currency cost of the transaction per unit of foreign currency obtained is the gold-export point. That per unit of foreign currency sold is the gold-import point. Also, foreign currency is sold, or purchased, at the exchange rate. Therefore arbitrageurs receive a profit proportional to the exchange-rate/gold-point divergence.

Gold-Point Arbitrage

However, the arbitrageurs’ supply of foreign currency eliminates profit by returning the exchange rate to below the gold-export point. Therefore perfect “gold-point arbitrage” would ensure that the exchange rate has upper limit of the gold-export point. Similarly, the arbitrageurs’ demand for foreign currency returns the exchange rate to above the gold-import point, and perfect arbitrage ensures that the exchange rate has that point as a lower limit. It is important to note what induces the private sector to engage in gold-point arbitrage: (1) the profit motive; and (2) the credibility of the commitment to (a) the fixed gold price and (b) freedom of foreign exchange and gold transactions, on the part of the monetary authorities of both countries.

Gold-Point Spread

The difference between the gold points is called the (gold-point) spread. The gold points and the spread may be expressed as percentages of parity. Estimates of gold points and spreads involving center countries are provided for the classical and interwar gold standards in Tables 4 and 5. Noteworthy is that the spread for a given country pair generally declines over time both over the classical gold standard (evidenced by the dollar-sterling figures) and for the interwar compared to the classical period.

Table 4Gold-Point Estimates: Classical Gold Standard
Countries Period Gold Pointsa(percent) Spreadd(percent) Method of Computation
Exportb Importc
U.S./Britain 1881-1890 0.6585 0.7141 1.3726 PA
U.S./Britain 1891-1900 0.6550 0.6274 1.2824 PA
U.S./Britain 1901-1910 0.4993 0.5999 1.0992 PA
U.S./Britain 1911-1914 0.5025 0.5915 1.0940 PA
France/U.S. 1877-1913 0.6888 0.6290 1.3178 MED
Germany/U.S. 1894-1913 0.4907 0.7123 1.2030 MED
France/Britain 1877-1913 0.4063 0.3964 0.8027 MED
Germany/Britain 1877-1913 0.3671 0.4405 0.8076 MED
Germany/France 1877-1913 0.4321 0.5556 0.9877 MED
Austria/Britain 1912 0.6453 0.6037 1.2490 SE
Netherlands/Britain 1912 0.5534 0.3552 0.9086 SE
Scandinaviae /Britain 1912 0.3294 0.6067 0.9361 SE

a For numerator country.
b Gold-import point for denominator country.
c Gold-export point for denominator country.
d Gold-export point plus gold-import point.
e Denmark, Sweden, and Norway.

Method of Computation: PA = period average. MED = median exchange rate form estimate of various authorities for various dates, converted to percent deviation from parity. SE = single exchange-rate- form estimate, converted to percent deviation from parity.

Sources: U.S./Britain — Officer (1996, p. 174). France/U.S., Germany/U.S., France/Britain, Germany/Britain, Germany/France — Morgenstern (1959, pp. 178-81). Austria/Britain, Netherlands/Britain, Scandinavia/Britain — Easton (1912, pp. 358-63).

Table 5Gold-Point Estimates: Interwar Gold Standard
Countries Period Gold Pointsa(percent) Spreadd(percent) Method of Computation
Exportb Importc
U.S./Britain 1925-1931 0.6287 0.4466 1.0753 PA
U.S./France 1926-1928e 0.4793 0.5067 0.9860 PA
U.S./France 1928-1933f 0.5743 0.3267 0.9010 PA
U.S./Germany 1926-1931 0.8295 0.3402 1.1697 PA
France/Britain 1926 0.2042 0.4302 0.6344 SE
France/Britain 1929-1933 0.2710 0.3216 0.5926 MED
Germany/Britain 1925-1933 0.3505 0.2676 0.6181 MED
Canada/Britain 1929 0.3521 0.3465 0.6986 SE
Netherlands/Britain 1929 0.2858 0.5146 0.8004 SE
Denmark/Britain 1926 0.4432 0.4930 0.9362 SE
Norway/Britain 1926 0.6084 0.3828 0.9912 SE
Sweden/Britain 1926 0.3881 0.3828 0.7709 SE

a For numerator country.
b Gold-import point for denominator country.
c Gold-export point for denominator country.
d Gold-export point plus gold-import point.
e To end of June 1928. French-franc exchange-rate stabilization, but absence of currency convertibility; see Table 2.
f Beginning July 1928. French-franc convertibility; see Table 2.

Method of Computation: PA = period average. MED = median exchange rate form estimate of various authorities for various dates, converted to percent deviation from parity. SE = single exchange-rate- form estimate, converted to percent deviation from parity.

Sources: U.S./Britain — Officer (1996, p. 174). U.S./France, U.S./Germany, France/Britain 1929- 1933, Germany/Britain — Morgenstern (1959, pp. 185-87). Canada/Britain, Netherlands/Britain — Einzig (1929, pp. 98-101) [Netherlands/Britain currencies’ mint parity from Spalding (1928, p. 135). France/Britain 1926, Denmark/Britain, Norway/Britain, Sweden/Britain — Spalding (1926, pp. 429-30, 436).

The effective monetary standard of a country is distinguishable from its legal standard. For example, a country legally on bimetallism usually is effectively on either a gold or silver monometallic standard, depending on whether its “mint-price ratio” (the ratio of its mint price of gold to mint price of silver) is greater or less than the world price ratio. In contrast, a country might be legally on a gold standard but its banks (and government) have “suspended specie (gold) payments” (refusing to convert their notes into gold), so that the country is in fact on a “paper standard.” The criterion adopted here is that a country is deemed on the gold standard if (1) gold is the predominant effective metallic money, or is the monetary bullion, (2) specie payments are in force, and (3) there is a limitation on the coinage and/or the legal-tender status of silver (the only practical and historical competitor to gold), thus providing institutional or legal support for the effective gold standard emanating from (1) and (2).

Implications for Money Supply

Consider first the domestic gold standard. Under a pure coin standard, the gold in circulation, monetary base, and money supply are all one. With a mixed standard, the money supply is the product of the money multiplier (dependent on the commercial-banks’ reserves/deposit and the nonbank-public’s currency/deposit ratios) and the monetary base (the actual and potential reserves of the commercial banking system, with potential reserves held by the nonbank public). The monetary authority alters the monetary base by changing its gold holdings and its loans, discounts, and securities portfolio (non gold assets, called its “domestic assets”). However, the level of its domestic assets is dependent on its gold reserves, because the authority generates demand liabilities (notes and deposits) by increasing its assets, and convertibility of these liabilities must be supported by a gold reserve, if the gold standard is to be maintained. Therefore the gold standard provides a constraint on the level (or growth) of the money supply.

The international gold standard involves balance-of-payments surpluses settled by gold imports at the gold-import point, and deficits financed by gold exports at the gold-export point. (Within the spread, there are no gold flows and the balance of payments is in equilibrium.) The change in the money supply is then the product of the money multiplier and the gold flow, providing the monetary authority does not change its domestic assets. For a country on a gold- exchange standard, holdings of “foreign exchange” (the reserve currency) take the place of gold. In general, the “international assets” of a monetary authority may consist of both gold and foreign exchange.

The Classical Gold Standard

Dates of Countries Joining the Gold Standard

Table 1 (above) lists all countries that were on the classical gold standard, the gold- standard type to which each adhered, and the period(s) on the standard. Discussion here concentrates on the four core countries. For centuries, Britain was on an effective silver standard under legal bimetallism. The country switched to an effective gold standard early in the eighteenth century, solidified by the (mistakenly) gold-overvalued mint-price ratio established by Isaac Newton, Master of the Mint, in 1717. In 1774 the legal-tender property of silver was restricted, and Britain entered the gold standard in the full sense on that date. In 1798 coining of silver was suspended, and in 1816 the gold standard was formally adopted, ironically during a paper-standard regime (the “Bank Restriction Period,” of 1797-1821), with the gold standard effectively resuming in 1821.

The United States was on an effective silver standard dating back to colonial times, legally bimetallic from 1786, and on an effective gold standard from 1834. The legal gold standard began in 1873-1874, when Acts ended silver-dollar coinage and limited legal tender of existing silver coins. Ironically, again the move from formal bimetallism to a legal gold standard occurred during a paper standard (the “greenback period,” of 1861-1878), with a dual legal and effective gold standard from 1879.

International Shift to the Gold Standard

The rush to the gold standard occurred in the 1870s, with the adherence of Germany, the Scandinavian countries, France, and other European countries. Legal bimetallism shifted from effective silver to effective gold monometallism around 1850, as gold discoveries in the United States and Australia resulted in overvalued gold at the mints. The gold/silver market situation subsequently reversed itself, and, to avoid a huge inflow of silver, many European countries suspended the coinage of silver and limited its legal-tender property. Some countries (France, Belgium, Switzerland) adopted a “limping” gold standard, in which existing former-standard silver coin retained full legal tender, permitting the monetary authority to redeem its notes in silver as well as gold.

As Table 1 shows, most countries were on a gold-coin (always meaning mixed) standard. The gold-bullion standard did not exist in the classical period (although in Britain that standard was embedded in legislation of 1819 that established a transition to restoration of the gold standard). A number of countries in the periphery were on a gold-exchange standard, usually because they were colonies or territories of a country on a gold-coin standard. In situations in which the periphery country lacked its own (even-coined) currency, the gold-exchange standard existed almost by default. Some countries — China, Persia, parts of Latin America — never joined the classical gold standard, instead retaining their silver or bimetallic standards.

Sources of Instability of the Classical Gold Standard

There were three elements making for instability of the classical gold standard. First, the use of foreign exchange as reserves increased as the gold standard progressed. Available end-of- year data indicate that, worldwide, foreign exchange in official reserves (the international assets of the monetary authority) increased by 36 percent from 1880 to 1899 and by 356 percent from 1899 to 1913. In comparison, gold in official reserves increased by 160 percent from 1880 to 1903 but only by 88 percent from 1903 to 1913. (Lindert, 1969, pp. 22, 25) While in 1913 only Germany among the center countries held any measurable amount of foreign exchange — 15 percent of total reserves excluding silver (which was of limited use) — the percentage for the rest of the world was double that for Germany (Table 6). If there were a rush to cash in foreign exchange for gold, reduction or depletion of the gold of reserve-currency countries could place the gold standard in jeopardy.

Table 6Share of Foreign Exchange in Official Reserves(end of year, percent)
Country 1928b
Excluding Silverb
0 10
0 0c
0d 51
13 16
27 32

a Official reserves: gold, silver, and foreign exchange.
b Official reserves: gold and foreign exchange.
c Less than 0.05 percent.
d Less than 0.5 percent.

Sources: 1913 — Lindert (1969, pp. 10-11). 1928 — Britain: Board of Governors of the Federal Reserve System [cited as BG] (1943, p. 551), Sayers (1976, pp. 348, 352) for Bank of England dollar reserves (dated January 2, 1929). United States: BG (1943, pp. 331, 544), foreign exchange consisting of Federal Reserve Banks holdings of foreign-currency bills. France and Germany: Nurkse (1944, p. 234). Rest of world [computed as residual]: gold, BG (1943, pp. 544-51); foreign exchange, from “total” (Triffin, 1964, p. 66), France, and Germany.

Second, Britain — the predominant reserve-currency country — was in a particularly sensitive situation. Again considering end-of 1913 data, almost half of world foreign-exchange reserves were in sterling, but the Bank of England had only three percent of world gold reserves (Tables 7-8). Defining the “reserve ratio” of the reserve-currency-country monetary authority as the ratio of (i) official reserves to (ii) liabilities to foreign monetary authorities held in financial institutions in the country, in 1913 this ratio was only 31 percent for the Bank of England, far lower than those of the monetary authorities of the other core countries (Table 9). An official run on sterling could easily force Britain off the gold standard. Because sterling was an international currency, private foreigners also held considerable liquid assets in London, and could themselves initiate a run on sterling.

Table 7Composition of World Official Foreign-Exchange Reserves(end of year, percent)
1913a British pounds 77
2 French francs }2}



a Excluding holdings for which currency unspecified.
b Primarily Dutch guilders and Scandinavian kroner.

Sources: 1913 — Lindert (1969, pp. 18-19). 1928 — Components of world total: Triffin (1964, pp. 22, 66), Sayers (1976, pp. 348, 352) for Bank of England dollar reserves (dated January 2, 1929), Board of Governors of the Federal Reserve System [cited as BG] (1943, p. 331) for Federal Reserve Banks holdings of foreign-currency bills.

Table 8Official-Reserves Components: Percent of World Total(end of year)
Country 1928
Gold Foreign Exchange
0 7 United States 27 0a
0b 13 Germany 6 4
95 36 Table 9Reserve Ratiosa of Reserve-Currency Countries

(end of year)

Country 1928c
Excluding Silverc
0.31 0.33
90.55 5.45
2.38 not available
2.11 not available

a Ratio of official reserves to official liquid liabilities (that is, liabilities to foreign governments and central banks).
b Official reserves: gold, silver, and foreign exchange.
c Official reserves: gold and foreign exchange.

Sources : 1913 — Lindert (1969, pp. 10-11, 19). Foreign-currency holdings for which currency unspecified allocated proportionately to the four currencies based on known distribution. 1928 — Gold reserves: Board of Governors of the Federal Reserve System [cited as BG] (1943, pp. 544, 551). Foreign- exchange reserves: Sayers (1976, pp. 348, 352) for Bank of England dollar reserves (dated January 2, 1929); BG (1943, p. 331) for Federal Reserve Banks holdings of foreign-currency bills. Official liquid liabilities: Triffin (1964, p. 22), Sayers (1976, pp. 348, 352).

Third, the United States, though a center country, was a great source of instability to the gold standard. Its Treasury held a high percentage of world gold reserves (more than that of the three other core countries combined in 1913), resulting in an absurdly high reserve ratio — Tables 7-9). With no central bank and a decentralized banking system, financial crises were frequent. Far from the United States assisting Britain, gold often flowed from the Bank of England to the United States to satisfy increases in U.S. demand for money. Though in economic size the United States was the largest of the core countries, in many years it was a net importer rather than exporter of capital to the rest of the world — the opposite of the other core countries. The political power of silver interests and recurrent financial panics led to imperfect credibility in the U.S. commitment to the gold standard. Runs on banks and runs on the Treasury gold reserve placed the U.S. gold standard near collapse in the early and mid-1890s. During that period, the credibility of the Treasury’s commitment to the gold standard was shaken. Indeed, the gold standard was saved in 1895 (and again in 1896) only by cooperative action of the Treasury and a bankers’ syndicate that stemmed gold exports.

Rules of the Game

According to the “rules of the [gold-standard] game,” central banks were supposed to reinforce, rather than “sterilize” (moderate or eliminate) or ignore, the effect of gold flows on the monetary supply. A gold outflow typically decreases the international assets of the central bank and thence the monetary base and money supply. The central-bank’s proper response is: (1) raise its “discount rate,” the central-bank interest rate for rediscounting securities (cashing, at a further deduction from face value, a short-term security from a financial institution that previously discounted the security), thereby inducing commercial banks to adopt a higher reserves/deposit ratio and therefore decreasing the money multiplier; and (2) decrease lending and sell securities, thereby decreasing domestic assets and thence the monetary base. On both counts the money supply is further decreased. Should the central bank rather increase its domestic assets when it loses gold, it engages in “sterilization” of the gold flow and is decidedly not following the “rules of the game.” The converse argument (involving gold inflow and increases in the money supply) also holds, with sterilization involving the central bank decreasing its domestic assets when it gains gold.

Price Specie-Flow Mechanism

A country experiencing a balance-of-payments deficit loses gold and its money supply decreases, both automatically and by policy in accordance with the “rules of the game.” Money income contracts and the price level falls, thereby increasing exports and decreasing imports. Similarly, a surplus country gains gold, the money supply increases, money income expands, the price level rises, exports decrease and imports increase. In each case, balance-of-payments equilibrium is restored via the current account. This is called the “price specie-flow mechanism.” To the extent that wages and prices are inflexible, movements of real income in the same direction as money income occur; in particular, the deficit country suffers unemployment but the payments imbalance is nevertheless corrected.

The capital account also acts to restore balance, via interest-rate increases in the deficit country inducing a net inflow of capital. The interest-rate increases also reduce real investment and thence real income and imports. Similarly, interest-rate decreases in the surplus country elicit capital outflow and increase real investment, income, and imports. This process enhances the current-account correction of the imbalance.

One problem with the “rules of the game” is that, on “global-monetarist” theoretical grounds, they were inconsequential. Under fixed exchange rates, gold flows simply adjust money supply to money demand; the money supply is not determined by policy. Also, prices, interest rates, and incomes are determined worldwide. Even core countries can influence these variables domestically only to the extent that they help determine them in the global marketplace. Therefore the price-specie-flow and like mechanisms cannot occur. Historical data support this conclusion: gold flows were too small to be suggestive of these mechanisms; and prices, incomes, and interest rates moved closely in correspondence (rather than in the opposite directions predicted by the adjustment mechanisms induced by the “rules of the game”) — at least among non-periphery countries, especially the core group.

Discount Rate Rule and the Bank of England

However, the Bank of England did, in effect, manage its discount rate (“Bank Rate”) in accordance with rule (1). The Bank’s primary objective was to maintain convertibility of its notes into gold, that is, to preserve the gold standard, and its principal policy tool was Bank Rate. When its “liquidity ratio” of gold reserves to outstanding note liabilities decreased, it would usually increase Bank Rate. The increase in Bank Rate carried with it market short-term increase rates, inducing a short-term capital inflow and thereby moving the exchange rate away from the gold-export point by increasing the exchange value of the pound. The converse also held, with a rise in the liquidity ratio involving a Bank Rate decrease, capital outflow, and movement of the exchange rate away from the gold import point. The Bank was constantly monitoring its liquidity ratio, and in response altered Bank Rate almost 200 times over 1880- 1913.

While the Reichsbank (the German central bank), like the Bank of England, generally moved its discount rate inversely to its liquidity ratio, most other central banks often violated the rule, with changes in their discount rates of inappropriate direction, or of insufficient amount or frequency. The Bank of France, in particular, kept its discount rate stable. Unlike the Bank of England, it chose to have large gold reserves (see Table 8), with payments imbalances accommodated by fluctuations in its gold rather than financed by short-term capital flows. The United States, lacking a central bank, had no discount rate to use as a policy instrument.

Sterilization Was Dominant

As for rule (2), that the central-bank’s domestic and international assets move in the same direction; in fact the opposite behavior, sterilization, was dominant, as shown in Table 10. The Bank of England followed the rule more than any other central bank, but even so violated it more often than not! How then did the classical gold standard cope with payments imbalances? Why was it a stable system?

Table 10Annual Changes in Internationala and Domesticb Assets of Central BankPercent of Changes in the Same Directionc
1880-1913d Britain 33
__ France 33
31 British Dominionse 13
32 Scandinaviag 25
33 South Americai 23

a 1880-1913: Gold, silver and foreign exchange. 1922-1936: Gold and foreign exchange.
b Domestic income-earning assets: discounts, loans, securities.
c Implying country is following “rules of the game.” Observations with zero or negligible changes in either class of assets excluded.
d Years when country is off gold standard excluded. See Tables 1 and 2.
e Australia and South Africa.
f1880-1913: Austria-Hungary, Belgium, and Netherlands. 1922-1936: Austria, Italy, Netherlands, and Switzerland.
g Denmark, Finland, Norway, and Sweden.
h1880-1913: Russia. 1922-1936: Bulgaria, Czechoslovakia, Greece, Hungary, Poland, Romania, and Yugoslavia.
I Chile, Colombia, Peru, and Uruguay.

Sources: Bloomfield (1959, p. 49), Nurkse (1944, p. 69).

The Stability of the Classical Gold Standard

The fundamental reason for the stability of the classical gold standard is that there was always absolute private-sector credibility in the commitment to the fixed domestic-currency price of gold on the part of the center country (Britain), two (France and Germany) of the three remaining core countries, and certain other European countries (Belgium, Netherlands, Switzerland, and Scandinavia). Certainly, that was true from the late-1870s onward. (For the United States, this absolute credibility applied from about 1900.) In earlier periods, that commitment had a contingency aspect: it was recognized that convertibility could be suspended in the event of dire emergency (such as war); but, after normal conditions were restored, convertibility would be re-established at the pre-existing mint price and gold contracts would again be honored. The Bank Restriction Period is an example of the proper application of the contingency, as is the greenback period (even though the United States, effectively on the gold standard, was legally on bimetallism).

Absolute Credibility Meant Zero Convertibility and Exchange Risk

The absolute credibility in countries’ commitment to convertiblity at the existing mint price implied that there was extremely low, essentially zero, convertibility risk (the probability that Treasury or central-bank notes would not be redeemed in gold at the established mint price) and exchange risk (the probability that the mint parity between two currencies would be altered, or that exchange control or prohibition of gold export would be instituted).

Reasons Why Commitment to Convertibility Was So Credible

There were many reasons why the commitment to convertibility was so credible. (1) Contracts were expressed in gold; if convertibility were abandoned, contracts would inevitably be violated — an undesirable outcome for the monetary authority. (2) Shocks to the domestic and world economies were infrequent and generally mild. There was basically international peace and domestic calm.

(3) The London capital market was the largest, most open, most diversified in the world, and its gold market was also dominant. A high proportion of world trade was financed in sterling, London was the most important reserve-currency center, and balances of payments were often settled by transferring sterling assets rather than gold. Therefore sterling was an international currency — not merely supplemental to gold but perhaps better: a boon to non- center countries, because sterling involved positive, not zero, interest return and its transfer costs were much less than those of gold. Advantages to Britain were the charges for services as an international banker, differential interest returns on its financial intermediation, and the practice of countries on a sterling (gold-exchange) standard of financing payments surpluses with Britain by piling up short-term sterling assets rather than demanding Bank of England gold.

(4) There was widespread ideology — and practice — of “orthodox metallism,” involving authorities’ commitment to an anti-inflation, balanced-budget, stable-money policy. In particular, the ideology implied low government spending and taxes and limited monetization of government debt (financing of budget deficits by printing money). Therefore it was not expected that a country’s price level or inflation would get out of line with that of other countries, with resulting pressure on the country’s adherence to the gold standard. (5) This ideology was mirrored in, and supported by, domestic politics. Gold had won over silver and paper, and stable-money interests (bankers, industrialists, manufacturers, merchants, professionals, creditors, urban groups) over inflationary interests (farmers, landowners, miners, debtors, rural groups).

(6) There was freedom from government regulation and a competitive environment, domestically and internationally. Therefore prices and wages were more flexible than in other periods of human history (before and after). The core countries had virtually no capital controls; the center country (Britain) had adopted free trade, and the other core countries had moderate tariffs. Balance-of-payments financing and adjustment could proceed without serious impediments.

(7) Internal balance (domestic macroeconomic stability, at a high level of real income and employment) was an unimportant goal of policy. Preservation of convertibility of paper currency into gold would not be superseded as the primary policy objective. While sterilization of gold flows was frequent (see above), the purpose was more “meeting the needs of trade” (passive monetary policy) than fighting unemployment (active monetary policy).

(8) The gradual establishment of mint prices over time ensured that the implied mint parities (exchange rates) were in line with relative price levels; so countries joined the gold standard with exchange rates in equilibrium. (9) Current-account and capital-account imbalances tended to be offsetting for the core countries, especially for Britain. A trade deficit induced a gold loss and a higher interest rate, attracting a capital inflow and reducing capital outflow. Indeed, the capital- exporting core countries — Britain, France, and Germany — could eliminate a gold loss simply by reducing lending abroad.

Rareness of Violations of Gold Points

Many of the above reasons not only enhanced credibility in existing mint prices and parities but also kept international-payments imbalances, and hence necessary adjustment, of small magnitude. Responding to the essentially zero convertibility and exchange risks implied by the credible commitment, private agents further reduced the need for balance-of-payments adjustment via gold-point arbitrage (discussed above) and also via a specific kind of speculation. When the exchange rate moved beyond a gold point, arbitrage acted to return it to the spread. So it is not surprising that “violations of the gold points” were rare on a monthly average basis, as demonstrated in Table 11 for the dollar, franc, and mark exchange rate versus sterling. Certainly, gold-point violations did occur; but they rarely persisted sufficiently to be counted on monthly average data. Such measured violations were generally associated with financial crises. (The number of dollar-sterling violations for 1890-1906 exceeding that for 1889-1908 is due to the results emanating from different researchers using different data. Nevertheless, the important common finding is the low percent of months encompassed by violations.)

Table 11Violations of Gold Points
Exchange Rate Time Period Number of Months Number dollar-sterling 240 0.4
1890-1906 3 dollar-sterling 76 0
1889-1908 12b mark-sterling 240 7.5

a May 1925 – August 1931: full months during which both United States and Britain on gold standard.
b Approximate number, deciphered from graph.

Sources: Dollar-sterling, 1890-1906 and 1925-1931 — Officer (1996, p. 235). All other — Giovannini (1993, pp. 130-31).

Stabilizing Speculation

The perceived extremely low convertibility and exchange risks gave private agents profitable opportunities not only outside the spread (gold-point arbitrage) but also within the spread (exchange-rate speculation). As the exchange value of a country’s currency weakened, the exchange rate approaching the gold-export point, speculators had an ever greater incentive to purchase domestic currency with foreign currency (a capital inflow); for they had good reason to believe that the exchange rate would move in the opposite direction, whereupon they would reverse their transaction at a profit. Similarly, a strengthened currency, with the exchange rate approaching the gold-import point, involved speculators selling the domestic currency for foreign currency (a capital outflow). Clearly, the exchange rate would either not go beyond the gold point (via the actions of other speculators of the same ilk) or would quickly return to the spread (via gold-point arbitrage). Also, the further the exchange rate moved toward the gold point, the greater the potential profit opportunity; for there was a decreased distance to that gold point and an increased distance from the other point.

This “stabilizing speculation” enhanced the exchange value of depreciating currencies that were about to lose gold; and thus the gold loss could be prevented. The speculation was all the more powerful, because the absence of controls on capital movements meant private capital flows were highly responsive to exchange-rate changes. Dollar-sterling data, in Table 12, show that this speculation was extremely efficient in keeping the exchange rate away from the gold points — and increasingly effective over time. Interestingly, these statements hold even for the 1890s, during which at times U.S. maintenance of currency convertibility was precarious. The average deviation of the exchange rate from the midpoint of the spread fell decade-by-decade from about 1/3 of one percent of parity in 1881-1890 (23 percent of the gold-point spread) to only 12/100th of one percent of parity in 1911-1914 (11 percent of the spread).

Table 12Average Deviation of Dollar-Sterling Exchange Rate from Gold-Point-Spread Midpoint
Percent of Parity Quarterly observations
0.32 1891-1900 19
0.15 1911-1914a 11
0.28 Monthly observations
0.24 1925-1931c 26

a Ending with second quarter of 1914.
b Third quarter 1925 – second quarter 1931: full quarters during which both United States and Britain on gold standard.
c May 1925 – August 1931: full months during which both United States and Britain on gold standard.

Source: Officer (1996, pp. 182, 191, 272).

Government Policies That Enhanced Gold-Standard Stability

Government policies also enhanced gold-standard stability. First, by the turn of the century South Africa — the main world gold producer — sold all its gold in London, either to private parties or actively to the Bank of England, with the Bank serving also as residual purchaser of the gold. Thus the Bank had the means to replenish its gold reserves. Second, the orthodox- metallism ideology and the leadership of the Bank of England — other central banks would often gear their monetary policy to that of the Bank — kept monetary policies harmonized. Monetary discipline was maintained.

Third, countries used “gold devices,” primarily the manipulation of gold points, to affect gold flows. For example, the Bank of England would foster gold imports by lowering the foreign gold-export point (number of units of foreign currency per pound, the British gold-import point) through interest-free loans to gold importers or raising its purchase price for bars and foreign coin. The Bank would discourage gold exports by lowering the foreign gold-import point (the British gold-export point) via increasing its selling prices for gold bars and foreign coin, refusing to sell bars, or redeeming its notes in underweight domestic gold coin. These policies were alternative to increasing Bank Rate.

The Bank of France and Reichsbank employed gold devices relative to discount-rate changes more than Britain did. Some additional policies included converting notes into gold only in Paris or Berlin rather than at branches elsewhere in the country, the Bank of France converting its notes in silver rather than gold (permitted under its “limping” gold standard), and the Reichsbank using moral suasion to discourage the export of gold. The U.S. Treasury followed similar policies at times. In addition to providing interest-free loans to gold importers and changing the premium at which it would sell bars (or refusing to sell bars outright), the Treasury condoned banking syndicates to put pressure on gold arbitrageurs to desist from gold export in 1895 and 1896, a time when the U.S. adherence to the gold standard was under stress.

Fourth, the monetary system was adept at conserving gold, as evidenced in Table 3. This was important, because the increased gold required for a growing world economy could be obtained only from mining or from nonmonetary hoards. While the money supply for the eleven- major-country aggregate more than tripled from 1885 to 1913, the percent of the money supply in the form of metallic money (gold and silver) more than halved. This process did not make the gold standard unstable, because gold moved into commercial-bank and central-bank (or Treasury) reserves: the ratio of gold in official reserves to official plus money gold increased from 33 to 54 percent. The relative influence of the public versus private sector in reducing the proportion of metallic money in the money supply is an issue warranting exploration by monetary historians.

Fifth, while not regular, central-bank cooperation was not generally required in the stable environment in which the gold standard operated. Yet this cooperation was forthcoming when needed, that is, during financial crises. Although Britain was the center country, the precarious liquidity position of the Bank of England meant that it was more often the recipient than the provider of financial assistance. In crises, it would obtain loans from the Bank of France (also on occasion from other central banks), and the Bank of France would sometimes purchase sterling to push up that currency’s exchange value. Assistance also went from the Bank of England to other central banks, as needed. Further, the credible commitment was so strong that private bankers did not hesitate to make loans to central banks in difficulty.

In sum, “virtuous” two-way interactions were responsible for the stability of the gold standard. The credible commitment to convertibility of paper money at the established mint price, and therefore the fixed mint parities, were both a cause and a result of (1) the stable environment in which the gold standard operated, (2) the stabilizing behavior of arbitrageurs and speculators, and (3) the responsible policies of the authorities — and (1), (2), and (3), and their individual elements, also interacted positively among themselves.

Experience of Periphery

An important reason for periphery countries to join and maintain the gold standard was the access to the capital markets of the core countries thereby fostered. Adherence to the gold standard connoted that the peripheral country would follow responsible monetary, fiscal, and debt-management policies — and, in particular, faithfully repay the interest on and principal of debt. This “good housekeeping seal of approval” (the term coined by Bordo and Rockoff, 1996), by reducing the risk premium, involved a lower interest rate on the country’s bonds sold abroad, and very likely a higher volume of borrowing. The favorable terms and greater borrowing enhanced the country’s economic development.

However, periphery countries bore the brunt of the burden of adjustment of payments imbalances with the core (and other Western European) countries, for three reasons. First, some of the periphery countries were on a gold-exchange standard. When they ran a surplus, they typically increased — and with a deficit, decreased — their liquid balances in London (or other reserve-currency country) rather than withdraw gold from the reserve-currency country. The monetary base of the periphery country would increase, or decrease, but that of the reserve-currency country would remain unchanged. This meant that such changes in domestic variables — prices, incomes, interest rates, portfolios, etc.–that occurred to correct the surplus or deficit, were primarily in the periphery country. The periphery, rather than the core, “bore the burden of adjustment.”

Second, when Bank Rate increased, London drew funds from France and Germany, that attracted funds from other Western European and Scandinavian countries, that drew capital from the periphery. Also, it was easy for a core country to correct a deficit by reducing lending to, or bringing capital home from, the periphery. Third, the periphery countries were underdeveloped; their exports were largely primary products (agriculture and mining), which inherently were extremely sensitive to world market conditions. This feature made adjustment in the periphery compared to the core take the form more of real than financial correction. This conclusion also follows from the fact that capital obtained from core countries for the purpose of economic development was subject to interruption and even reversal. While the periphery was probably better off with access to the capital than in isolation, its welfare gain was reduced by the instability of capital import.

The experience on adherence to the gold standard differed among periphery groups. The important British dominions and colonies — Australia, New Zealand, Canada, and India — successfully maintained the gold standard. They were politically stable and, of course, heavily influenced by Britain. They paid the price of serving as an economic cushion to the Bank of England’s financial situation; but, compared to the rest of the periphery, gained a relatively stable long-term capital inflow. In undeveloped Latin American and Asia, adherence to the gold standard was fragile, with lack of complete credibility in the commitment to convertibility. Many of the reasons for credible commitment that applied to the core countries were absent — for example, there were powerful inflationary interests, strong balance-of-payments shocks, and rudimentary banking sectors. For Latin America and Asia, the cost of adhering to the gold standard was very apparent: loss of the ability to depreciate the currency to counter reductions in exports. Yet the gain, in terms of a steady capital inflow from the core countries, was not as stable or reliable as for the British dominions and colonies.

The Breakdown of the Classical Gold Standard

The classical gold standard was at its height at the end of 1913, ironically just before it came to an end. The proximate cause of the breakdown of the classical gold standard was political: the advent of World War I in August 1914. However, it was the Bank of England’s precarious liquidity position and the gold-exchange standard that were the underlying cause. With the outbreak of war, a run on sterling led Britain to impose extreme exchange control — a postponement of both domestic and international payments — that made the international gold standard non-operational. Convertibility was not legally suspended; but moral suasion, legalistic action, and regulation had the same effect. Gold exports were restricted by extralegal means (and by Trading with the Enemy legislation), with the Bank of England commandeering all gold imports and applying moral suasion to bankers and bullion brokers.

Almost all other gold-standard countries undertook similar policies in 1914 and 1915. The United States entered the war and ended its gold standard late, adopting extralegal restrictions on convertibility in 1917 (although in 1914 New York banks had temporarily imposed an informal embargo on gold exports). An effect of the universal removal of currency convertibility was the ineffectiveness of mint parities and inapplicability of gold points: floating exchange rates resulted.

Interwar Gold Standard

Return to the Gold Standard

In spite of the tremendous disruption to domestic economies and the worldwide economy caused by World War I, a general return to gold took place. However, the resulting interwar gold standard differed institutionally from the classical gold standard in several respects. First, the new gold standard was led not by Britain but rather by the United States. The U.S. embargo on gold exports (imposed in 1917) was removed in 1919, and currency convertibility at the prewar mint price was restored in 1922. The gold value of the dollar rather than of the pound sterling would typically serve as the reference point around which other currencies would be aligned and stabilized. Second, it follows that the core would now have two center countries, the United Kingdom and the United States.

Third, for many countries there was a time lag between stabilizing a country’s currency in the foreign-exchange market (fixing the exchange rate or mint parity) and resuming currency convertibility. Given a lag, the former typically occurred first, currency stabilization operating via central-bank intervention in the foreign-exchange market (transacting in the domestic currency and a reserve currency, generally sterling or the dollar). Table 2 presents the dates of exchange- rate stabilization and currency convertibility resumption for the countries on the interwar gold standard. It is fair to say that the interwar gold standard was at its height at the end of 1928, after all core countries were fully on the standard and before the Great Depression began.

Fourth, the contingency aspect of convertibility conversion, that required restoration of convertibility at the mint price that existed prior to the emergency (World War I), was broken by various countries — even core countries. Some countries (including the United States, United Kingdom, Denmark, Norway, Netherlands, Sweden, Switzerland, Australia, Canada, Japan, Argentina) stabilized their currencies at the prewar mint price. However, other countries (France, Belgium, Italy, Portugal, Finland, Bulgaria, Romania, Greece, Chile) established a gold content of their currency that was a fraction of the prewar level: the currency was devalued in terms of gold, the mint price was higher than prewar. A third group of countries (Germany, Austria, Hungary) stabilized new currencies adopted after hyperinflation. A fourth group (Czechoslovakia, Danzig, Poland, Estonia, Latvia, Lithuania) consisted of countries that became independent or were created following the war and that joined the interwar gold standard. A fifth group (some Latin American countries) had been on silver or paper standards during the classical period but went on the interwar gold standard. A sixth country group (Russia) had been on the classical gold standard, but did not join the interwar gold standard. A seventh group (Spain, China, Iran) joined neither gold standard.

The fifth way in which the interwar gold standard diverged from the classical experience was the mix of gold-standard types. As Table 2 shows, the gold coin standard, dominant in the classical period, was far less prevalent in the interwar period. In particular, all four core countries had been on coin in the classical gold standard; but, of them, only the United States was on coin interwar. The gold-bullion standard, nonexistent prewar, was adopted by two core countries (United Kingdom and France) as well as by two Scandinavian countries (Denmark and Norway). Most countries were on a gold-exchange standard. The central banks of countries on the gold-exchange standard would convert their currencies not into gold but rather into “gold-exchange” currencies (currencies themselves convertible into gold), in practice often sterling, sometimes the dollar (the reserve currencies).

Instability of the Interwar Gold Standard

The features that fostered stability of the classical gold standard did not apply to the interwar standard; instead, many forces made for instability. (1) The process of establishing fixed exchange rates was piecemeal and haphazard, resulting in disequilibrium exchange rates. The United Kingdom restored convertibility at the prewar mint price without sufficient deflation, resulting in an overvalued currency of about ten percent. (Expressed in a common currency at mint parity, the British price level was ten percent higher than that of its trading partners and competitors). A depressed export sector and chronic balance-of-payments difficulties were to result. Other overvalued currencies (in terms of mint parity) were those of Denmark, Italy, and Norway. In contrast, France, Germany, and Belgium had undervalued currencies. (2) Wages and prices were less flexible than in the prewar period. In particular, powerful unions kept wages and unemployment high in British export industries, hindering balance-of-payments correction.

(3) Higher trade barriers than prewar also restrained adjustment.

(4) The gold-exchange standard economized on total world gold via the gold of reserve- currency countries backing their currencies in their reserves role for countries on that standard and also for countries on a coin or bullion standard that elected to hold part of their reserves in London or New York. (Another economizing element was continuation of the move of gold out of the money supply and into banking and official reserves that began in the classical period: for the eleven-major-country aggregate, gold declined to less than œ of one percent of the money supply in 1928, and the ratio of official gold to official-plus-money gold reached 99 percent — Table 3). The gold-exchange standard was inherently unstable, because of the conflict between (a) the expansion of sterling and dollar liabilities to foreign central banks to expand world liquidity, and (b) the resulting deterioration in the reserve ratio of the Bank of England, and U.S. Treasury and Federal Reserve Banks.

This instability was particularly severe in the interwar period, for several reasons. First, France was now a large official holder of sterling, with over half the official reserves of the Bank of France in foreign exchange in 1928, versus essentially none in 1913 (Table 6); and France was resentful that the United Kingdom had used its influence in the League of Nations to induce financially reconstructed countries in Europe to adopt the gold-exchange (sterling) standard. Second, many more countries were on the gold-exchange standard than prewar. Cooperation in restraining a run on sterling or the dollar would be difficult to achieve. Third, the gold-exchange standard, associated with colonies in the classical period, was viewed as a system inferior to a coin standard.

(5) In the classical period, London was the one dominant financial center; in the interwar period it was joined by New York and, in the late 1920s, Paris. Both private and official holdings of foreign currency could shift among the two or three centers, as interest-rate differentials and confidence levels changed.

(6) The problem with gold was not overall scarcity but rather maldistribution. In 1928, official reserve-currency liabilities were much more concentrated than in 1913: the United Kingdom accounted for 77 percent of world foreign-exchange reserves and France less than two percent (versus 47 and 30 percent in 1913 — Table 7). Yet the United Kingdom held only seven percent of world official gold and France 13 percent (Table 8). Reflecting its undervalued currency, France also possessed 39 percent of world official foreign exchange. Incredibly, the United States held 37 percent of world official gold — more than all the non-core countries together.

(7) Britain’s financial position was even more precarious than in the classical period. In 1928, the gold and dollar reserves of the Bank of England covered only one third of London’s liquid liabilities to official foreigners, a ratio hardly greater than in 1913 (and compared to a U.S. ratio of almost 5œ — Table 9). Various elements made the financial position difficult compared to prewar. First, U.K. liquid liabilities were concentrated on stronger countries (France, United States), whereas its liquid assets were predominantly in weaker countries (such as Germany). Second, there was ongoing tension with France, that resented the sterling-dominated gold- exchange standard and desired to cash in its sterling holding for gold to aid its objective of achieving first-class financial status for Paris.

(8) Internal balance was an important goal of policy, which hindered balance-of-payments adjustment, and monetary policy was affected greatly by domestic politics rather than geared to preservation of currency convertibility. (9) Especially because of (8), the credibility in authorities’ commitment to the gold standard was not absolute. Convertibility risk and exchange risk could be well above zero, and currency speculation could be destabilizing rather than stabilizing; so that when a country’s currency approached or reached its gold-export point, speculators might anticipate that currency convertibility would not be maintained and the currency devalued. Hence they would sell rather than buy the currency, which, of course, would help bring about the very outcome anticipated.

(10) The “rules of the game” were infrequently followed and, for most countries, violated even more often than in the classical gold standard — Table 10. Sterilization of gold inflows by the Bank of England can be viewed as an attempt to correct the overvalued pound by means of deflation. However, the U.S. and French sterilization of their persistent gold inflows reflected exclusive concern for the domestic economy and placed the burden of adjustment on other countries in the form of deflation.

(11) The Bank of England did not provide a leadership role in any important way, and central-bank cooperation was insufficient to establish credibility in the commitment to currency convertibility.

Breakdown of the Interwar Gold Standard

Although Canada effectively abandoned the gold standard early in 1929, this was a special case in two respects. First, the action was an early drastic reaction to high U.S. interest rates established to fight the stock-market boom but that carried the threat of unsustainable capital outflow and gold loss for other countries. Second, use of gold devices was the technique used to restrict gold exports and informally terminate the Canadian gold standard.

The beginning of the end of the interwar gold standard occurred with the Great Depression. The depression began in the periphery, with low prices for exports and debt-service requirements leading to insurmountable balance-of-payments difficulties while on the gold standard. However, U.S. monetary policy was an important catalyst. In the second half of 1927 the Federal Reserve pursued an easy-money policy, which supported foreign currencies but also fed the boom in the New York stock market. Reversing policy to fight the Wall Street boom, higher interest rates attracted monies to New York, which weakened sterling in particular. The stock market crash in October 1929, while helpful to sterling, was followed by a passive monetary policy that did not prevent the U.S. depression that started shortly thereafter and that spread to the rest of the world via declines in U.S. trade and lending. In 1929 and 1930 a number of periphery countries either formally suspended currency convertibility or restricted it so that their currencies went beyond the gold-export point.

It was destabilizing speculation, emanating from lack of confidence in authorities’ commitment to currency convertibility that ended the interwar gold standard. In May 1931 there was a run on Austria’s largest commercial bank, and the bank failed. The run spread to Germany, where an important bank also collapsed. The countries’ central banks lost substantial reserves; international financial assistance was too late; and in July 1931 Germany adopted exchange control, followed by Austria in October. These countries were definitively off the gold standard.

The Austrian and German experiences, as well as British budgetary and political difficulties, were among the factors that destroyed confidence in sterling, which occurred in mid-July 1931. Runs on sterling ensued, and the Bank of England lost much of its reserves. Loans from abroad were insufficient, and in any event taken as a sign of weakness. The gold standard was abandoned in September, and the pound quickly and sharply depreciated on the foreign- exchange market, as overvaluation of the pound would imply.

Amazingly, there were no violations of the dollar-sterling gold points on a monthly average basis to the very end of August 1931 (Table 11). In contrast, the average deviation of the dollar-sterling exchange rate from the midpoint of the gold-point spread in 1925-1931 was more than double that in 1911-1914, by either of two measures (Table 12), suggesting less- dominant stabilizing speculation compared to the prewar period. Yet the 1925-1931 average deviation was not much more (in one case, even less) than in earlier decades of the classical gold standard. The trust in the Bank of England had a long tradition, and the shock to confidence in sterling that occurred in July 1931 was unexpected by the British authorities.

Following the U.K. abandonment of the gold standard, many countries followed, some to maintain their competitiveness via currency devaluation, others in response to destabilizing capital flows. The United States held on until 1933, when both domestic and foreign demands for gold, manifested in runs on U.S. commercial banks, became intolerable. The “gold bloc” countries (France, Belgium, Netherlands, Switzerland, Italy, Poland) and Danzig lasted even longer; but, with their currencies now overvalued and susceptible to destabilizing speculation, these countries succumbed to the inevitable by the end of 1936. Albania stayed on gold until occupied by Italy in 1939. As much as a cause, the Great Depression was a consequence of the gold standard; for gold-standard countries hesitated to inflate their economies for fear of weakening the balance of payments, suffering loss of gold and foreign-exchange reserves, and being forced to abandon convertibility or the gold parity. So the gold standard involved “golden fetters” (the title of the classic work of Eichengreen, 1992) that inhibited monetary and fiscal policy to fight the depression. Therefore, some have argued, these fetters seriously exacerbated the severity of the Great Depression within countries (because expansionary policy to fight unemployment was not adopted) and fostered the international transmission of the Depression (because as a country’s output decreased, its imports fell, thus reducing exports and income of other countries).

The “international gold standard,” defined as the period of time during which all four core countries were on the gold standard, existed from 1879 to 1914 (36 years) in the classical period and from 1926 or 1928 to 1931 (four or six years) in the interwar period. The interwar gold standard was a dismal failure in longevity, as well as in its association with the greatest depression the world has known.


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Convergence and Divergence of National Financial Systems: Evidence from the Gold Standards, 1871-1971

Author(s):Baubeau, Patrice
Ögren, Anders
Reviewer(s):Diebolt, Claude

Published by EH.NET (November 2010)

Patrice Baubeau and Anders ?gren, editors, Convergence and Divergence of National Financial Systems: Evidence from the Gold Standards, 1871-1971, London: Pickering and Chatto, 2010. xiv + 306 pp. $99 (hardcover), ISBN: 978-1-85196-648-6.

Reviewed for EH.Net by Claude Diebolt, French National Centre for Scientific Research (CNRS), University of Strasbourg.

This collective book edited by Patrice Baubeau (Universit? Paris Ouest-Nanterre La D?fense) and Anders ?gren (University of Uppsala) is part of the series ?Financial History? managed by Robert E. Wright. It was made possible thanks to a grant of the French Agence nationale de la recherche (National research agency ? ANR) and it is mainly the result of numerous workshops and conferences. The book conveys one central message, namely that history matters; this concept is enlarged to encompass a discussion of the convergence and divergence processes of national financial systems.

The work comprises four main parts which are gathered into chapters. Following an introduction written as a synthesis by Patrice Baubeau, a first part presents the social mechanisms of financial convergence. The reader will find there a contribution by Patrick Verley devoted to institutions and networks of Parisian brokers in the nineteenth century, followed by an article by Jean-Luc Mastin on the resistance of the Lille marketplace to national convergence.

The second part deals with national convergences and divergences in the long term. David Le Bris?s article presents a correlation analysis in terms of portfolio diversification and market integration between France and the Unites States. Carlo Brambilia focuses his analysis on convergence in European investment banking patterns until 1914. Finally Dirk Drechsel studies the Swiss banking crises during the Gold Standards, 1906-71.

The third part centers on convergence and the study of historical shocks. The short introduction by Patrice Baubeau and Anders ?gren questions the major role played by historical events. From this point of view the contribution of Pablo Martin-Acena, Elena Martine Ruiz and Maria A. Pons represents an original illustration around the financing of the Spanish Civil War, 1936-39. Richard Roberts goes back over the London financial crisis of 1914.

The fourth and last part of the book analyses convergence and monetary constraints. The study by Kalina Dimitrova and Luca Fantacci deals with the establishment of the Gold Standard in Southeast Europe. Antoine Gentier?s chapter focuses on the origins of the Italian banking crises of 1893. And the final contribution, by Jereon Euwe, concentrates on Amsterdam?s role as an international financial center, 1914-31.

Generally speaking this book represents for all those who are interested in historical processes of convergence and divergence of national financial systems a very serious, useful and pleasant to read synthesis effort both from a narrative as well as a quantitative point of view. It also provides a good illustration of contemporary debates on the links between economics and history. The practice of economic history is obviously closely dependent on its institutional setting (frame). Indeed economic history is located at the crossroad between two well established disciplines in the academic context, namely history and economics, but these two disciplines each gained an identity of their own and grew further and further apart. Ab initio both disciplines have aimed in the end at different objectives. When reading this book the historian finds in it an interpretative vision (verstehen) of reality. The economist misses a more mechanical vision (erkl?ren), more closely linked to the literature of the last twenty years in terms of economic growth and convergence. Actually the book tries to reconstruct a sequence of events as precisely as possible through a minute criticism of the sources and finally interprets them (tries to give them a meaning in a more global context) and even determines their causes and consequences. But the authors remain very cautious and their mistrust of this concept of ? at least deterministic ? cause underlies the whole construction. It is easy to identify at first sight the concern for the specificity, the context-dependency and reality of the facts. The authors hope to be able to understand the actors of the past, their values, representations, and culture without anachronism. Their great ambition is to reach a global understanding ? mainly through a systemic analysis ? of the evolution of national financial systems. With this aim they depart from present-day economic research. The quantitative approach is accepted and even assumed and used in order to specifically account however for a context-dependent reality. The verstehen has priority over the erkl?ren, the quantitative approach is meant as an illustration or support of the argument. The analysis is written in a natural language and not the formalized language used by modern economists who support the erkl?ren, the analysis of reality through a mathematical model, in search of pure objectivity, without any reference to non-quantitative information to be integrated into a formal construction which leads in the end mostly to a model expressed by equations. A more cliometric approach might have covered both sides of this epistemological barrier which separates history and economics. It is perfectly possible to call on sophisticated econometric methods to be integrated into a traditional approach of the work of the economic historian (to synthesize and interpret). Calling upon standard economic theory to confirm or invalidate its relevance by confronting it with data from the past to better understand the present and even anticipate the future could have been a central element of this analysis, this collective work, which is obviously incisive, stimulating and promising for future research devoted to national financial systems.

Claude Diebolt, research professor in economics (cliometrics) for the French National Centre for Scientific Research (CNRS) at the University of Strasbourg (France), is the editor of Cliometrica. He can be reached via email at

Copyright (c) 2010 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2010). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan

Author(s):Metzler, Mark
Reviewer(s):White, Eugene N.

Published by EH.NET (January 2007)

Mark Metzler, Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan. Berkeley: University of California Press, 2006. xxii + 370 pp. $50 (cloth), ISBN: 0-520-24420-6.

Reviewed for EH.NET by Eugene N. White, Department of Economics, Rutgers University.

Drawing extensively on archival sources, University of Texas professor Mark Metzler provides a detailed history of Japan’s experience with the gold standard. Japan’s interwar quest to return to gold is instructive not only as a policy problem but also because it was a key issue in Japan’s struggle over whether to join a liberal global economy or build a state-controlled empire.

Following Germany’s example after the Franco-Prussian War of extracting reparations to facilitate a move to the gold standard, Japan gained the needed reserves after the Sino-Japanese War of 1894-1895 yielded an indemnity from China. Whether the gold standard offered a nation a seal of good housekeeping when it sought to borrow abroad is currently hotly debated. For Japan, Metzler shows that moving to gold was considered as vital to gaining access to Western capital markets. But empire and gold went hand in hand. To prevent Russian dominance of Korea, Britain signed an alliance with Japan in 1902 that recognized Japanese interest in Korea, after which the British Foreign Office supported the sale of Japanese bonds in London. Japan had equal success on Wall Street, where a critical role was played by Jacob Schiff of Kuhn, Loeb who was eager to see anti-Semitic Russia (and the Morgan bank) defeated. As a result 40 percent of the 1904-1905 Russo-Japanese war was funded with overseas borrowing.

While conquest and the gold standard marched together up to this point, they now pulled Japan in opposite directions. Military-industrial interests wanted to increase government spending, while those committed to the gold standard pressed for balancing the budget and husbanding resources to pay the foreign debt. Metzler translates the two competing policies (sekkyoku seisaku and sh?kyoku seisaku) as “positive” and “negative” policies, suggesting that they represented Keynesian and monetarist approaches. Better translations would be “active” and “passive” policy, which reflected the expansionary imperialist program and the “rules of the game” followed by a liberal state. Two dramatis personae occupied center stage in this battle: Inoue Junnosuke (finance minister and governor of the Bank of Japan) and Takahashi Korekiyo (vice governor of the Bank of Japan, finance minister and prime minister) who respectively campaigned for classic liberal and expansionary economic polices.

By declaring war against Germany in 1914, Japan easily seized German concessions in China. Emboldened, Japan attempted to gain hegemony, issuing the infamous but unsuccessful “Twenty-One Demands” to the Chinese government. The war cost relatively little and created extraordinary export opportunities. The trade surplus led to an inrush of gold, producing a monetary expansion and inflation, and Japan only exited the gold standard after the U.S. embargoed gold exports in 1917.

The worldwide postwar boom was amplified by “positive” policies pursued by finance minister Takahashi who saw an opportunity for Japan to catch up. The government floated new bonds to finance military spending, notably the anti-Bolshevik Siberian expedition. Warning about the dangers of a speculation boom, governor of the Bank of Japan Inoue, lobbied the cabinet to lift the gold embargo. When the Bank of Japan was permitted to raise interest rates in 1919, the boom came to a resounding end with a stock market crash and bank runs.

The battered economy never truly recovered in the 1920s. A gold standard at the prewar parity was a distant goal because postwar deflation was insufficient. Although volatile, the yen was often 20% below its prewar value. A key problem that worsened with time was the Japanese military’s political independence, which made budget cuts difficult. Fiscal policy was loose, but the Bank of Japan kept its key rate over 8% from 1919 to 1925. Chances of an early return to gold ended with the great 1923 Kant? earthquake that devastated Tokyo and Yokohama. The Bank of Japan provided massive credits to banks. Rolled over year after year, they added to the bad loans from the collapse of the postwar boom, undermining the solvency of the banking system.

After Britain’s return to gold in 1925, the government hoped to follow and began a retrenchment in 1926. The costs of an appreciating yen proved to be very high, wounding export industries. When the finance minister moved to clean up the banking system, a storm erupted in Parliament over the disclosure of weak banks. Rumors swirled, setting off a severe panic in 1927, in which 36 banks with 9% of deposits closed. The government fell, and Takahasi returned to the finance ministry, where he halted retrenchment and allowed the yen to depreciate.

Yet by 1929, a new government concluded that a restoration of the gold standard was necessary as Japan’s foreign loans were coming due and needed to be refinanced. Assistance came from the House of Morgan led by Thomas Lamont. An enthusiastic supporter of (some would say, apologist for) Japan, Lamont demanded a “thorough-going” deflation and an end to the government’s “extravagance.” He supported Inoue for whom a return to gold was a matter of honor. The government began an extraordinary campaign, exhorting people to give up unneeded luxuries; and a propaganda pamphlet was distributed to almost every household. Movies and popular songs promoted the government’s plan. The “Retrenchment Ditty,” a movie theme song, entreated the public: Let’s retrench, let’s retrench?..

You give up salt, I’ll give up tea isn’t it so? Lifting the gold embargo (that’s right absolutely) until the joyful lifting of the embargo.

In spite of the 1929 stock market crash a Morgan-led group of banks provided a $25 million loan (to which London added ?5 million) for a cushion of reserves that enabled Japan to lift the gold embargo on January 11, 1930. An overvalued yen caused gold to flow out, yielding a 25% decline in prices. The effects were wrenching. Wage cuts spread across industry, followed by strikes and rising unemployment. Indebted farmers began to fail when world rice and silk prices collapsed. Panics hit the Tokyo stock exchange in April and September 1930.

Whatever control the government had over the military was lost in 1931 when faked Chinese sabotage on the South Manchurian Railway allowed the army to attack China. After Britain abandoned gold in September 1931, a run on the yen began. Inoue tried to stop it by raising interest rates. For his efforts to restrain military spending, he was assassinated in 1932 by a member of the right-wing Blood Pledge Corps. Back at the finance ministry, Takahashi took the yen off gold in December 1931. Budget deficits were financed with money creation; but when inflation picked up, he tried to cut the military budget in 1936. Wrathful ultranationalist officers shot and hacked the 82-year-old finance minister to death in his bed. Gearing up for war, the army’s general staff drafted a five-year plan in 1937 that buried what remained of the liberal economy.

Metzler’s book provides a solid, nuanced and depressing account of the failure of the interwar gold standard in Japan. One can only speculate that had Japan returned to gold at less than its prewar value, the country could have avoided the wrenching deflation that radicalized the public and produced allies for the fanatics promoting imperial expansion.

Eugene N. White is professor of economics at Rutgers University and a NBER research associate. His most recent publication is “Bubbles and Busts: The 1990s in the Mirror of the 1920s,” in G. Toniolo and P. Rhode, editors, The Global Economy in the 1990s: A Long-run Perspective (Cambridge University Press, 2006). He is currently writing on war finance and the microstructure of the NYSE and the Paris Bourse.

Subject(s):Military and War
Geographic Area(s):Asia
Time Period(s):20th Century: Pre WWII

The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848-1873

Author(s):Flandreau, Marc
Reviewer(s):Sicsic, Pierre

Published by EH.NET (December 2006)

Marc Flandreau The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848-1873. New York: Oxford University Press, 2004. xxiii + 319 pp. $125 (cloth), ISBN: 0-19-925786-8.

Reviewed for EH.NET by Pierre Sicsic, Bank of France.

This is a gem of a book. Marc Flandreau’s rewritten published dissertation, L’or du Monde, explains how the bimetallic system was much more stable than is usually thought, and that it helped to buffer the shock of gold discovery in 1848 (meaning in that instance limiting inflation). Its eventual demise in 1873 was not the result of any economic cause (excess supply of silver, or efficiency gain of some kind), but of the French decision to try to impede the smooth German transition to a gold standard. Throughout the book Flandreau does not pull his punches, making clear his many disagreements with previous scholars.

The introduction makes the very important point that France in the mid century was a very large country in terms of specie holdings (45 percent of its seven-country sample). Then a general equilibrium model is set up in Chapter 1 with four demands: monetary and non-monetary demands for gold and silver. It is shown that there is a range of indeterminate bimetallic equilibria, and therefore that there is no knife-edge instability in a bimetallic system, provided one was lucky enough not to set the official silver/gold price outside of the equilibria range.

Chapter 2 shows that gold and silver circulated together in France, if not in Paris, using the specie surveys (Chapter 4 deals with the same issue by estimating France’s specie holdings from 1840 to 1878). France was not in a de facto gold standard after 1848. In the same chapter, using the Rothschild archives, internal arbitrage gold-silver points are computed. Together with the market price in Paris, they are consistent with some silver remaining in circulation in some parts of the country. This is economic history at its best. First show that some interesting outcome is theoretically possible, then show first that it actually happened and second explain how it made empirical sense that it did happen. Chapter 3 shows that silver was exported and gold imported into France and examines the economics of the exchange rate.

Chapter 5 looks at the Banque de France’s policy of purchasing gold and making payments in silver, and concludes that this policy was merely “surfing on a market wave” – that is following market signals. Chapter 6 depicts the business plan of the old Haute Banque (Rothschild), which involved arbitrage between markets (Paris and London), as well as trading in local markets and the industrial activity of minting.

Chapter 7 starts by quoting inflationary fears in the mid 1850s after the gold finds in California and Australia. Then it explains that the net goods exports had to balance the specie flows, and that the goods flows are consistent with a wealth effect enriching people from countries were gold was found. The model of Chapter 1 is then estimated with France monetary holdings and world stocks of the two metals. The “lost secret” of bimetallism’s stability shows up in the variables used for this estimation. There was a sustained production of silver, 5 billion francs vs. 12 billion francs of gold were mined in the twenty years up to 1870, while the gold stock held in France increased from 1 to 6 billion francs and the silver stock decreased from 2.5 to 1 billion francs. Bimetallism was indeed a remarkably supple system.

Why then did bimetallism come to an end? Chapter 8 looks at the usual explanations. Using simulations of his model, Flandreau dismisses the excess supply of silver – even after the German shift to gold. German holdings in silver were 1.9 billion francs. The sound money view according to which gold standard was less inflationary than bimetallism is dismissed because of anachronism: in the mid-nineteenth century, the gold standard was inflationary. Finally the transaction cost argument is refuted because small change was indeed provided by coins with a lower silver content, and because the freight and insurance cost of bullion shipment was linked to the value and not to the weight of the shipment.

France decided to demonetize silver to bother Germany, which had to unload its silver when it adopted of the gold standard. Germany’s adoption was made possible by the 5 billion franc war indemnity paid in international bills, most of them convertible into gold. In this coordination problem (i.e., Franco-German rivalry) lies the reason of the accidental demise of bimetallism. At this junction one would like to be told why Germany decided to shift to the gold standard.

Two points are made in the conclusion. The first one is that global financial integration existed much before the gold standard. This is true for co-movements of interest rates and bullion flows. This is not as true for financial flows. The second one is that the gold standard enabled concentration of bullion holdings in central banks. Thus the primary responsibility for managing the global monetary system was taken away from private concerns (the “market”). It opened the way to the nationalization of money, and macroeconomic rules became essential: “the question revolved on the ‘credibility’ of monetary institutions, which boiled down to making sure that they behaved as though the did not exist.” In the end Flandreau concludes that the gold standard was modern, even though private arbitrages under bimetallism were pretty sophisticated, because it opened the way to macroeconomic monetary policy, and was bound to give way to managed currency.

I have a slight disagreement with Flandreau about his criticism of the fundamentals theory of the end of bimetallism. While I am convinced that bimetallism could have been maintained in France (and in the U.S.) in 1873, I think the fundamentals theory would have eventually led to its end at a 15.5 (or 16) to 1 relative price after 1890. It would be interesting to keep simulating the model used in the book with metal output up to 1895. Moreover, as stated in chapter 1, monetary demand depends on the expected purchasing power of the specie balances. Therefore, an expected surge of silver mining might lead to an expected loss of purchasing power of silver, and decline in silver money demand. With perfect foresight, bimetallism breaks down as soon as the silver output surge is expected.

Finally, after reading The Glitter of Gold I went back to the famous “crime of 1873″ counterfactual by Milton Friedman. I now believe that the most relevant counterfactual is that the U.S. and France would have remained on bimetallism, for less than twenty years. Then the “sophisticated” simulation with the silver price going down to 23.7 is much less likely than the 16 to 1 simulation. I find it interesting that the deflation in this (likely) simulation also provided by Friedman is very close to the actual deflation, while it disappears in the “sophisticated” simulation.

Everyone interested in monetary history or in mid-nineteenth century French economic history should read Marc Flandreau’s book. If in a hurry and with some prior knowledge of the bimetallic issues, read the first two chapters, jump to Chapter 7 parts 3 to 5, and then to Chapter 8 part 2 and the conclusion.

Pierre Sicsic, who is director of the Balance of Payments in the Bank of France, is the author (with Pierre-Cyrille Hautcoeur) of “Threat of a Capital Levy, Expected Devaluation and Interest Rates in France during the Interwar Period,” European Review of Economic History, 1999.

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Europe
Time Period(s):19th Century

Money and Politics: European Monetary Unification and the International Gold Standard (1865-1873)

Author(s):Einaudi, Luca
Reviewer(s):Cohen, Benjamin J.

Published by EH.NET (January 2004)

Luca Einaudi, Money and Politics: European Monetary Unification and the International Gold Standard (1865-1873). Oxford: Oxford University Press, 2001. xiii + 241 pp. $100 (cloth), ISBN: 0-19-924366-2.

Reviewed for EH.NET by Benjamin J. Cohen, Department of Political Science, University of California at Santa Barbara.

Research in recent years has greatly revised our understanding of the origins of the classical gold standard. Once, the monetary regime that dominated the pre-World War I era was perceived as largely apolitical — a system that came to prevail over available alternatives mainly because of its inherent superiority in preserving currency values and financial stability. Today, however, we know better, thanks to the work of such able scholars as Barry Eichengreen, Michael Bordo, Marc Flandreau, and Marcello de Cecco. The political roots of the gold standard lie exposed, going back to the Great Power politics of the 1860s. Now comes Luca Einaudi, currently a research associate at Cambridge University, to add more detail to the story. It is a fascinating tale.

Einaudi’s focus is on the failed attempt in the 1860s to achieve a broad monetary union in Europe, despite the best efforts of the government of France under Napoleon III. In contrast to most previous studies of the era, which concentrate on the protracted contest between the rival systems of gold monometallism and bimetallism, Money and Politics stresses the pivotal role of the debate on European monetary unification that followed creation of the Latin Monetary Union (LMU) in 1865. In 1867 Paris convened an international monetary conference that voted unanimously in favor of a universal coinage building on the LMU-franc system. But even though a number of governments subsequently passed laws to adopt the LMU system, seemingly placing Europe on the road to full monetary unification, the effort ultimately failed, owing in good part to resistance from both Britain and the new German Empire. For Einaudi, the clash of national interests provoked by France’s ambitious project was decisive in accounting for the final triumph of gold. A seemingly neutral standard based on gold proved politically more acceptable than a monetary union under French leadership.

Based on extensive new archival research, the book is organized into five chapters. Following a general overview in the first chapter of Europe’s monetary arrangements and politics in 1865, Einaudi examines the birth of the LMU in chapter 2, the intellectual debate provoked by the 1867 monetary conference in chapter 3, the subsequent history of the LMU in chapter 4, and the responses of Britain and Prussia, later Germany, in chapter 5. In an epilogue, Einaudi summarizes the analysis and laments the failure of France’s initiative which, he suggests, might well have been more effective than was the gold standard in promoting peace and cooperation in Europe.

Central to Einaudi’s narrative is F?lix Esquirou de Parieu, vice president of the French Council of State (1855-1870) and chief architect of France’s monetary project. Originally trained as a lawyer, Parieu in time became one of France’s leading financial specialists and, from 1858 onward, a determined advocate of European monetary unification. In 1865, declares Einaudi, Parieu was “the right man in the right place for monetary diplomacy. … a curious mixture of political realism and utopian aspirations” (pp. 49, 54). Parieu presided over both the Convention of 1865 and the 1867 monetary conference, and the LMU and the universal-coinage proposal were each largely his creation. The project’s ultimate failure left him personally embittered and politically marginalized.

The villain of the piece, according to Einaudi, was the “growing wave of nationalism” (p. 189) at the time — specifically, the Great Power aspirations of Britain and Prussia-Germany. The British, with their superiority in manufacturing and with London’s role at the apex of global finance, were reluctant to subscribe to any arrangement that would leave them subordinate to their historical enemy, France. For Britain, the fabled pound was “the symbol of its economic success. [Britain] had no wish to see it overshadowed” (p. 193). London sent no official delegation to the conference in 1867 and flatly refused to accept the conference’s recommendations. From Prussia the initial response was more ambiguous, but after the fierce Franco-Prussian War (1870-1871) and the emergence of the new German Empire under Prussian leadership, it was clear that the Germans too would be unwilling to follow France’s lead. In Einaudi’s words: “The Franco-Prussian War crushed the political equilibrium on which the Union was based. … unification and coordination could not survive the poisoned atmosphere between France and Germany” (pp. 89, 189).

Overall, Einaudi’s analysis is difficult to fault and adds substantially to our knowledge of the origins of the gold standard. Some might question the central role assigned to France in his narrative, but in fact such an emphasis seems a welcome corrective to the priority traditionally accorded Britain in the bulk of the English-language literature. However dominant the City of London may have been in global finance at the time, Paris remained a powerful monetary force for much of the European continent. Likewise, some might question the lack of attention paid to the underlying economics of the period — in particular, the shifting price relationship between gold and silver, which undoubtedly doomed the bimetallic standard favored by France’s Ministry of Finance — but this too may be justified by the paucity of political analysis characteristic of many other scholarly contributions. Meticulously researched and clearly written, Money and Politics belongs on the bookshelf of anyone with a professional interest in international monetary history.

Benjamin J. Cohen is the Louis G. Lancaster Professor of International Political Economy at the University of California, Santa Barbara, and is the author of The Future of Money (Princeton University Press, 2003).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):19th Century

The Gold Standard Illusion: France, the Bank of France, and the International Gold Standard, 1914-1939

Author(s):Moure, Kenneth
Reviewer(s):Sicsic, Pierre

Published by EH.NET (January 2003)

Kenneth Moure, The Gold Standard Illusion: France, the Bank of France, and

the International Gold Standard, 1914-1939. New York: Oxford University

Press, 2002. xiv + 297 pp. $72 (hardcover), ISBN: 0-19-92490-4.

Reviewed for EH.NET by Pierre Sicsic, Caisse des d?p?ts et consignations.

After a first book on French monetary policy from 1928 to 1936 entitled

Managing the Franc Poincar?, published in 1991, Ken Mour? (Department of

History, University of California, Santa Barbara) expands here his analysis by

looking at the whole period from 1914 to 1939. He is the first historian to

make such an extensive use of the archives of the Bank of France. He provides

the reader with a well-balanced, complete and up-to-date review of the

literature. There is, however, a lack of commentary on core economic variables

which would help to set the stage and provide a thread to follow the drama. The

underlying variables up to the stabilization are the public debt and the

advances of the Bank of France. Some discussion of the size of these variables

relative to output is needed. I believe the most important variable to look at

is the real rate of interest which increases in case of deflation, hence the

Great Depression. A successful stabilization, as well as a successful

devaluation, permits a decrease in the long-term real rate of interest. I know

these variables are not easily obtained but they constitute the necessary

information for economic analysis of monetary policy.

Two very important points are made in the first half of the book. First, the

theory of stabilization and deflation was well understood at the beginning of

the 1920s. Second, delay in stabilization at the end of the twenties was a

powerful weapon in parliamentary politics.

The third chapter explains that the causality running from monetization of the

public debt to the exchange rate and the interplay between repayment of the

advances from the Bank of France by the Treasury, German reparations,

deflation, and finally return to the pre-war parity were already then well

articulated. There was an unsurprising opposition between the Central Bank and

the Treasury because of the scheduled repayments. “D?camps [the chief economist

of the Bank] offered a moderate, informed, and logically consistent

justification for deflation” (p. 60).

By 1924, after German default on reparations and tax increases, the economic

situation was ripe for stabilization. But the Bank of France and its board of

directors (the R?gents, private bankers and large industrialists) were

politically opposed to the new left wing government which followed the

elections. The Bank made sure this government entangled itself in a sham coming

from falsified balances sheets that had not been requested by this government.

Later on, the reversal of political alliances within the elected parliament

leading to a government headed by Poincar?, who had lost the 1924 elections,

would not have been possible without the threat to the franc. This is the story

told in chapter 4, and Mour? warns correctly that any explanation to the last

crisis of the franc in 1926 relying on strictly economic grounds (fiscal

policy, inadequate rates on short-term government bills) is going to

“understate the importance of the political crisis” (p. 103). To explain the

delay between the de facto stabilization in December 1926 and the de jure

stabilization in June 1928 Moure argues that “Poincar? realized the great

political utility of de facto stabilization. It kept alive the threat of

capital flight that bound the Radicals to his Union Nationale coalition … at

the same time it offered the determined revalorisateurs of the Right the

prospect of further appreciation” (p. 114).

Mour? is very convincing because he is able to discard the economic

explanations of the 1924-1926 turmoil he had previously reviewed before turning

to political history sources. Following the same political seam he debunks the

possibility of any relevant central bank cooperation by explaining that the

overall international political environment depended upon issues of reparation

and war debt repayment.

The weaker part of the book is the next to last chapter which mixes the

post-1936 period with comments from Bank of France officials about open market

operations made in 1928.

On the first issue the following point should have been made on the 1936

devaluation: while there is now agreement among economic historians that

devaluation had been everywhere else than in France the remedy to the Great

Depression, it did not go well in France.

On the second issue Mour? quotes confidential memos written by Rist arguing

against open market operations supported by Quesnay, also in the Bank, because

only some part of the market (the counterparties) would be served in these

operations. Rist was then deputy-governor; Mour? told us before that Rist and

Quesnay were the leading thinking force pushing for stabilization in 1926, and

Rist had been before quite right about the exchange rate policy: “Rist soon

realized [after the war] that restoring the franc’s pre-war parity would

extract too high a cost” (p. 51)

It would take as great a Francophobe as Keynes to believe that Rist could not

have grasped the substance of the money market. (Keynes said in 1930: “Both in

official and academic circles in France it is hardly an exaggeration to say

that economic science is non-existent,” quoted p. 39 in Managing the Franc

Poincar?.) What matters is that interest rates on the best paper would be

the same for transactions involving or not the Central Bank. Perhaps Rist was

using this traditional argument within the Bank because he was opposed to open

market operations for some other reason, and he used that argument knowing it

was wrong. This is the problem with the history of ideas and use of archives

from large institutions: you never know whether the argument is sincere.

Fortunately the book ends with a conclusion which does not mention the weaker

parts. One conclusion is that “the stabilization process paid insufficient

attention to currency valuation” (p. 262). This view on the level of

stabilization will settle our debate over deliberate undervaluation in 1928

(reviewed p. 129). It is worth recalling that from the end of 1923 to the

middle of 1925 the exchange rate in dollars relative to the pre-war parity was

about a third. It crashed to 0.13 in July 1926, then jumped back and was

stabilized to 0.21. After the dollar devaluation in 1933 this exchange rate was

0.36. The bottom line of the book is that “French authorities resisted

rethinking their battle-hardened faith in gold, which seemed to have yielded

extraordinary benefits in the years 1926 to 1932″ (p. 264). Yes, the Gold

Standard was an illusion, and it looked so potent because it was the outcome of

the miracle of 1926.

Pierre Sicsic is author of “Threat of a Capital Levy, Expected Devaluation and

Interest Rates in France during the Interwar Period” with Pierre-Cyrille

Hautcoeur, European Review of Economic History, 1999.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

Battles for the Standard: Bimetallism and the Spread of the Gold Standard in the Nineteenth Century

Author(s):Wilson, Ted
Reviewer(s):Meissner, Christopher M.

Published by EH.NET (January 2002)


Ted Wilson, Battles for the Standard: Bimetallism and the Spread of the Gold Standard in the Nineteenth Century. Aldershot, UK: Ashgate, 2001. xi + 200 pp. $69.95 (cloth), ISBN: 1-85928-436-1.

Reviewed for EH.NET by Christopher M. Meissner, Faculty of Economics and Politics, University of Cambridge.

In Battles for the Standard, Ted Wilson aims to explain why the gold standard moved from an exclusively British institution at the beginning of the nineteenth century to the most widely used monetary arrangement in the world by 1910. The author offers a number of case studies each of which emphasize that broad ranging explanations are inadequate to explain why the world went to gold. Wilson also examines bimetallism as a brake on the spread of the gold standard between 1870 and 1913. In his opinion, bimetallists failed because of the inability to formulate a coherent vision of what the candidate regime would look like and how the system would perform if implemented. Those interested in institutional change or the evolution of the international monetary system will feel the book presents some interesting research.

Wilson opens with a general examination of monetary arrangements during the nineteenth century. A series of chapters then outlines nineteenth century monetary history in Great Britain, France, India, and the US. The penultimate chapter considers and challenges current explanations for the emergence of the gold standard making reference to particular country experiences and the final chapter is about bimetallism in England during the 1890s.

The country coverage begins with Great Britain. The goal is to explain why it chose the gold standard in 1816 long before any other country had done so, and why it clung so steadfastly to the gold standard after 1870 in the face of considerable international maneuvering to establish bimetallism. British currency had been de facto gold through much of the 1700s and until 1800 lacked small denomination coins. The remedy was to implement a de jure gold standard so as to free England from the effects of Gresham’s law and to keep token silver coins in circulation. The fact that gold was the outcome in 1816 seems to have been pure historical coincidence. The author also gives air time to Angela Redish’s explanation that technological advances in steam pressing in the late eighteenth century allowed a token silver coinage which people could not counterfeit and which circulated along with full-bodied gold coins. This was an answer to bimetallism. It provided coins of silver and gold in denominations and weights appropriate to the value of a particular transaction without being exposed to Gresham’s Law. Wilson points out that few contemporary sources cite the steam technology as a reason for adopting the gold standard, and so he is skeptical that British obstinacy was based on these arguments. Furthermore European countries with access to the same technology did not adopt gold immediately. But arguments like Redish’s also rely on the notion that a gold standard was suited for more-developed countries because their average transaction was of a high value and bulky silver was inconvenient. And Germany and France did not reach the levels of 1820 British per capita GDP until about the 1860s precisely when these countries began agitating for an international gold standard (Maddison, 2001). The author explains how, during the 1880s, an appreciating exchange rate vis-?-vis silver countries made necessary imports cheaper while politically impotent agricultural interests were thrashed about by import competition. Britain therefore clung to gold.

Continuing his global overview, Wilson looks at France’s deep romance with bimetallism — a regime it finally relinquished in 1878 as the world silver market collapsed. It is suggested that the example of French bimetallism and its success between 1850 and 1870 provided a success story to which bimetallists in the 1890s could refer. In discussing France’s strong support for bimetallism up to 1878, Wilson dismisses the notion that the Banque de France benefited from the arbitrage opportunities bimetallism presented. Instead, Wilson argues tradition and historical esteem for the status quo explain France’s policies in the period. Although this explanation may be correct, the evidence presented is not convincing. For one, Wilson claims that since the gold price in terms of silver was stable from 1850 to 1870 there were no arbitrage opportunities. But Flandreau (1996) argues just the opposite. Arbitrage, perhaps by private agents, (who incidentally had some say on the board of directors at the Bank) actually worked to keep the price from straying too far from the mint ratio. And Einaudi (2000) presents an in-depth analysis of Bank of France archival records from the 1870s showing what the interests of the Bank were. Wilson’s work could have benefited from such archival investigation if only to lay bare the economic motivations of relevant actors.

Indian monetary history from the early 1800s up to 1900 is next on Wilson’s list of case studies. The chapter opens with a lengthy narrative on early nineteenth century Indian monetary history, and a conventional view of Indian regime preference after 1870 is presented. After about 1873, colonial powers would have preferred a gold standard in order to stop the rise in the value of the home charges and to keep their silver denominated pensions from depreciating in gold terms. Local export-oriented industrialists supported silver largely because of the expansionary effect of a continuously depreciating currency.

Americanists will find Chapter 5 on the United States to be somewhat sparse if not highly stylized. Wilson portrays the country as a relatively backward place where frontiersmen sought salvation in paper currencies. This line of argument neglects, or at least avoids, discussing the economic interests of the constituencies that shaped the debate and international differences in political procedure and decision making. Wilson pays little attention to the standard debtor-creditor debate or to the more contemporary open-economy politics view of Jeffrey Frieden (1997) where exporters and transport interests supported a depreciating standard. Nevertheless, the discussion of the conflict with Great Britain over Venezuela in the 1890s and how the gold-bug Cleveland administration used political uncertainty and hence money market uncertainty to discredit silver agitation is intriguing. (Many readers will be irked by seeing McKinley repeatedly referred to as “McKinlay” towards the end of the chapter.)

The following chapter ties up loose ends by confronting previous hypotheses about the emergence of the gold standard with historical experience. These focus not only on the countries already treated but also Germany and smaller peripheral countries. The seeds of what might have been an entire chapter on Germany appear here. Wilson asserts that Germany’s adoption of the gold standard “helped secure her economic leadership of Europe after 1870″ (p.124). Even if we are to believe the notion, what was the transmission mechanism? Was it that gold provided “hegemony over France” (p. 124) and somehow defeated this commercial rival or was it through increased trade benefits by linking up to the gold network? On historical grounds, we also have to suspect the digging has not been deep enough here. Wilson clings to a notion that the French indemnity of the Franco-Prussian war was paid in gold. Flandreau (1996) and Einaudi (2000) document that only about 5 percent of the indemnity was paid in specie the rest being paid in commercial paper drawable in various financial centers.

Even more confounding is the short follow up on the American adoption of the gold standard. The argument suggests that policy in the US was made without respect to the rest of the world. This is hardly the case. Much of the debate, which is documented in a lengthy set of congressional hearings held in the 1870s and published in 1879, was about ascertaining what exactly the rest of the world would be doing in the future. There is also a lengthy discussion on Bordo and Rockoff’s “Good Housekeeping Seal of Approval” hypothesis. The book proposes that there is no evidence that nations consciously sought to lower their borrowing costs or receive special treatment on international capital markets by adopting the gold standard. But historical evidence again snags the author’s momentum. It is widely argued that one of Russia’s primary motivations for moving to gold convertibility in the 1880s and 1890s was to attract foreign capital, and American Congressional discussions in the first decade of the 1900s on why China should adopt the gold standard centered on the ability to attract more foreign capital. A number of other aspects of monetary regime transformation such as lock-in and strategic complementarities, imperialistic preference for a non-gold periphery and precious metals discoveries are touched on near the end of this chapter as explanations for gold’s triumph.

The book winds down with a novel discussion of the emergence of a bimetallist movement in Great Britain near the end of the nineteenth century. Wilson centers his discussion in Lancashire. Essentially textile producers and laborers aligned themselves with a hope that bimetallism would stave off increased imports of Eastern textiles. Indian cotton manufactures benefited from the continuous depreciation of silver against gold and hence eroded market share, jobs and profits in England. Lancashire’s bimetallist agitators faced stiff resistance from City financiers and unsympathetic governments. But bimetallism appears to have been its own worst enemy. Its advocates failed because of the inability to present a coherent platform. What would the mint ratio be? Should it be the current market value of 35 to one or perhaps the older 15.5 to one? Should Britain insist on an international coalition to support such a move or would it go alone? Could Britain find a coalition in any case? No simple answers came from the movement, and gold took the day. The arguments here are interesting and suggestive, but the author could have spent more time on the little researched area of the viability of international bimetallism in the late nineteenth century. The author raises interesting questions, but there could be more discussion of the menu of alternatives and the benefits. Too little time is spent exploring the real benefits from the gold standard, and the author precipitously blames bimetallism’s failure on the incompetence of the movement’s leaders.

Overall this work is a good narrative of institutional change in the international monetary system. It provides a one-stop-shop for most of the current thinking about the emergence of the classical gold standard and the disappearance of bimetallism and silver between 1870 and 1913 while also providing a nice range of salient case studies. The book will prove useful for initiates to the literature. However those wishing to formulate solid opinions about the formation of an international monetary system will not feel the book has provided enough archival, statistical or theoretical ammunition to take out the more entrenched explanations. Nevertheless the book does succeed in laying the foundation for a debate about why bimetallism failed in the late nineteenth century. This is a corner of the literature that has seen far too little attention but it is a prime example of institutional change and path dependence in an important sphere of the economy. It certainly deserves more along these lines.


Einaudi, Luca (2001). Money and Politics: European Monetary Unification and the International Gold Standard (1865-1873). Oxford: Oxford University Press.

Flandreau, Marc (1996). “The French Crime of 1873: An Essay in the Emergence of the International Gold Standard, 1870-1880,” Journal of Economic History, 56 (4), 862-897.

Frieden, J.A. (1997) “Monetary Populism in Nineteenth Century America: An Open Economy Interpretation,” Journal of Economic History, 57 (2), 367-395.

Maddison, Angus (2001). The World Economy: A Millennial Perspective. Paris: Development Centre of the Organisation for Economic Co-operation and Development.

United States Monetary Commission (1879). Report of the Silver Commission. Government Printing Office, Washington, D.C.

Christopher M. Meissner is a lecturer in economics at the University of Cambridge and a fellow of King’s College. He is currently working on questions related to international finance and international monetary arrangements in the late nineteenth century and on connected lending in early nineteenth century New England banking.


Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII

Labour and Living Standards in Pre-Colonial West Africa: The Case of the Gold Coast

Author(s):Rönnbäck, Klas
Reviewer(s):Shumway, Rebecca

Published by EH.Net (October 2017)

Klas Rönnbäck, Labour and Living Standards in Pre-Colonial West Africa: The Case of the Gold Coast. New York: Routledge, 2016. xvii + 209 pp. $163 (cloth), ISBN: 978-1-84893-578-5.


Reviewed for EH.Net by Rebecca Shumway, Department of History, College of Charleston.
Taking as a case study the southern part of modern-day Ghana in West Africa, Labour and Living Standards in Pre-Colonial West Africa seeks to address the near absence of global comparative economic history dealing with living conditions in Africa. The aim of the book is to uncover the nature of living standards in pre-colonial Africa and to address the question of how the transatlantic slave trade affected those living standards. The focus is on the seventeenth and eighteenth centuries, the time when the transatlantic slave trade expanded in the part of West Africa known in that period as the Gold Coast.

Rönnbäck situates the study within a thorough review of economic theories in the introductory chapter. He describes the benefits and drawbacks of previous studies of neo-institutionalist theory, dependency theory and underdevelopment theory (and its critics). He also describes the relevant trends in African labor history, particularly those related to definitions of a “working class” and theories related to land abundance versus land scarcity in economic historiography.

The body of the book is seven chapters, followed by a brief conclusion. Chapter 2 reviews the existing economic history of the Gold Coast. Chapter 3 explains the sources used in the study and the methodology. Rönnbäck has done extensive research among the written records created by Europeans who lived on or visited the Gold Coast in the seventeenth and eighteenth centuries. He discounts the use of any other type of sources, shunning oral tradition in particular. His research hinges to a large extent on two databases he compiled from the European sources. The first, “The Gold Coast Pre-Colonial Price Database,” brings together data relating to what goods were purchased by the English Royal Africa Company, the prices at which they were purchased, and the goods sold on the coast during the period 1699-1760. The other, called “The Gold Coast Pre-Colonial Labour Database,” compiles the records of the Royal Africa Company’s payment of wages to its staff, including Europeans, free African laborers and slaves. These data sets undoubtedly represent a small fraction of the total number of commercial transactions and wage payments taking place in coastal Ghana during this period, but they provide a reasonable set of statistics for the type of analysis Rönnbäck makes in subsequent chapters. In compiling the Labor database, Rönnbäck appears to have made some questionable assumptions about the racial and ethnic identities of individuals. As he notes, some individuals are listed by full name in the account books, while many Africans are listed only by first name or without any name at all. His assumption that people listed with full names are Europeans, however, should be scrutinized. People of mixed European and African heritage frequently had European-sounding names but may not have been listed with a qualifying note as to their “mulatto” or “black” identity.

Chapter 4 explores the well-known phenomenon of Europeans’ racist attitudes toward Africans and their tendency to describe Africans as lazy or lacking a work ethic. Chapter 5 describes the nature of labor within Cape Coast Castle (headquarters of the English slave trade in Africa) and provides useful comparisons of wages for people of various occupations and comparison of wages for men versus women. Chapter 6 examines the domestic markets in the Gold Coast, with an emphasis on the Cape Coast daily market. Rönnbäck makes the very interesting observation that the demand for provisions (foodstuffs) from slave ships does not seem to have affected prices in Cape Coast. Local demand for provisions among inhabitants of towns and cities on the Gold Coast, he argues, was simply too great to be offset by the relatively minor demand from the slave trade. Chapter 7 makes a brief assessment of material culture on the Gold Coast, including houses, furnishings, clothing and other imported goods.

Chapter 8 provides an estimate of living standards on the Gold Coast using a method called welfare ratios, pioneered by Robert Allen, which allows comparison of historical material relating to living standards from various places around the globe. Here Rönnbäck charts the mean subsistence ratios for linguists, carpenters and canoemen between the 1660s and 1750, drawing on the work of Ray Kea and his own databases. He shows that subsistence ratios for one group, the canoemen, appear to have declined quite a bit between the 1660s and 1730s, suggesting that living standards for canoemen deteriorated over this span of time. Based on his calculations, Rönnbäck makes the intriguing suggestion that living standards on the Gold Coast may have deteriorated as a result of the influx of people into the coastal towns during the decades when the transatlantic slave trade was causing increased violence in the hinterland. As more unskilled labour became available, wage levels may have decreased. The influx of refugees may also have driven up the prices of staple goods, thereby reducing the living standards of waged workers. While Rönnbäck makes what seems an incorrect assumption that canoemen are among the “unskilled” workers on the coast, his overall conclusions are nevertheless provocative. His calculations ultimately suggest that the subsistence ratios for unskilled labour on the Gold Coast were comparable to those of unskilled workers elsewhere in the world — particularly India, Mexico and Austria — challenging the widespread assumption that Africans have historically been relatively impoverished.

This innovative work will be a helpful guide to historians of Africa in the era of the slave trade and to economic historians in search of a precolonial African case study with which to compare other cases. It brings together the English-language documentary sources and several other key European documentary sources in a thorough analysis of various aspects of the precolonial Gold Coast economy.

Rebecca Shumway is Assistant Professor of African History at the College of Charleston. Her main interests are West African history and the history of the Atlantic World and African Diaspora. Her most recent book is Slavery and its Legacy in Ghana and the Diaspora (with Trevor R. Getz), Bloomsbury Academic Press, 2017.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (October 2017). All EH.Net reviews are archived at

Subject(s):Labor and Employment History
Living Standards, Anthropometric History, Economic Anthropology
Geographic Area(s):Africa
Time Period(s):17th Century
18th Century

Monetary Standards in the Periphery: Paper, Silver and Gold, 1854-1933

Author(s):Acena, Pablo Martin
Reis, Jaime
Reviewer(s):Redish, Angela

Published by EH.NET (September 2000)

Pablo Martin Acena and Jaime Reis, editors, Monetary Standards in the

Periphery: Paper, Silver and Gold, 1854-1933. New York: St. Martin’s Press,

2000. x + 264 pp. $75 (cloth), ISBN: 0-312-22677-2.

Reviewed for EH.NET by Angela Redish, Department of Economics, University of

British Columbia and Bank of Canada.

The classical gold standard of the late nineteenth and early twentieth

centuries remains a touchstone for evaluating alternative international

monetary regimes. Therefore the operation of that standard has both

contemporary and historical implications. With some notable exceptions,

analyses have focused on the operation and costs and benefits of that regime in

a few “core” economies — predominantly the United Kingdom, the United States

and France. Thus, this book, in which leading monetary historians in six

“peripheral” economies present case-studies of the operation of the gold

standard, is particularly welcome.

The book begins with a brief chapter by Pablo Martin Acena, Jaime Reis and

Agustin Llona Rodriguez that summarizes the literature on two related themes

pursued (to varying degrees) in the case studies: the possibility that

adherence to the gold standard was more difficult in peripheral economies and

the possibility that the benefits of gold standard adherence were different for

the periphery. The article then suggests what can be learned from these six

economies. In a nutshell, the authors believe that adherence to the gold

standard was more difficult for peripheral countries (especially in Latin

America) because they faced volatile export prices, were sensitive to the

international capital market and had an underdeveloped financial system,

particularly no lender of last resort.

The six economies discussed in the book are Italy, Portugal and Spain (within

Europe) and Brazil, Chile and Columbia (within Latin America). The overall

picture presented is a diverse one, which is a little disheartening for those

wishing to take away general lessons. Was the gold standard an appropriate

monetary regime for peripheral countries? Jose Antonio Ocampo, writing on

Columbia, argues that it “worked” (perhaps not the strongest endorsement!) even

in the face of sharp external cycles. Rodriguez, writing on Chile, carefully

shows how the appropriate exchange rate regime might depend on the level of

development of the banking system. He argues that, in Chile, the paper standard

in the late nineteenth century had been a good fit. Did countries benefit from

a “Good Housekeeping seal of approval” if they joined the gold standard? Reis,

writing on Portugal, argues that this did not happen. Portugal did not enjoy

low interest rates as a member of the gold standard club, but, on the other

hand, it did not behave according to the rules either. In Italy and Spain, for

much of the period, exchange rates were stable even without formal adherence to

the gold standard. But if being on the gold standard assured easier/cheaper

access to international capital markets, why pay the price of acting like a

convertible currency without getting the benefit of the “seal”? (This is an

issue that has similarities with the current debate about the advantages of

explicit targets for the implementation of monetary policy.)

This book may find its principal use as a source for those studying the

monetary systems of individual countries, but let me turn to what I took away

from the whole. Firstly, economies on paper money standards experienced a wide

range of macro-economic outcomes. As Tolstoy might have put it, “All metallic

standards resemble one another; every paper standard is a standard in its own

way.” Fiat money standards provide the scope for everything from high inflation

to stable prices. Given that today most economies are searching for the optimal

paper standard it is this diverse experience off the gold standard that may

have the most useful lessons for understanding the international monetary


Secondly, while the introductory chapter emphasizes that these six economies

spent more time off than on a metallic standard, there is an interesting common

chronology underlying that statistic. For virtually all of the first thirty

years of the period covered, Chile, Columbia, Portugal, and Spain were on

metallic standards; from 1880 to the mid-1920s most regimes were paper based;

and, in the mid-1920s, there was a return to metallism in Latin American and

Italy. Were there common factors in the suspension and return to

convertibility? Again there is more diversity than uniformity. Chile suspended

convertibility after enduring balance of payments problems from 1875-78 as the

price of wheat and copper fell, and these problems were then exacerbated by the

War of the Pacific (1879-83). Columbia’s civil war began in 1885 leading to the

issue of inconvertible paper. Portugal suspended the gold standard as a result

of fallout from the dramatic depreciation in Brazil after the 1889 Republican

revolution there, and also from the cessation of lending by the Barings.

Finally, Spain’s suspension appears to have been caused by the dramatic fall in

the price of silver in the early 1880s. (The discussion of the return to

metallism in the 1920s is told only for Columbia where the influence of the

renowned Dr. Kemmerer was (pro)found.)

Finally, the summary chapter stresses the need for greater emphasis on

political economy analyses of the monetary standard issue, and I strongly

concur. While economic factors, such as the dependence on a few exports whose

prices are volatile, were important vulnerabilities for the peripheral

countries, perhaps the most significant threats to metallism were war and

unstable political processes. This of course was equally true in the core: the

Franco-Prussian War, the US Civil War and the First World War all led to

suspensions of convertibility, and Barry Eichengreen and others have argued for

the importance of changing political systems in the collapse of the gold

standard in the core countries during the interwar period. A monetary system is

a social contract, and its strength will reflect the degree of social cohesion.

Before wholeheartedly recommending this book, let me just add a brief wish

list. The book would have profited from a concluding chapter that pulled the

material together even more than in the introductory chapter, focusing on

whether or not mistakes were made and whether or not there are lessons that can

be learned. The book might have also benefited had the authors of the case

studies presented comparable material and coverage. For example, the time

periods differed quite starkly, with the chapter on Brazil focusing only on the

ten gold standard years, while other chapters covered only subsets of the

period–to 1891 (Portugal) and to 1914 (Spain and Italy). My last request would

be for a common set of data tables, which would have enhanced the usefulness of

the book as a source for comparative financial history. That said, however,

there are a vast number of data tables and plenty of references for those who

want to go further.

Let me then end as I began: there is not sufficient knowledge about the

experience of peripheral economies during the heyday of the international gold

standard, and this book goes a long way toward filling gaps in our information.

Angela Redish is the author of Bimetallism: An Economic and Historical

Analysis recently published by Cambridge University Press. She is currently

Special Advisor at the Bank of Canada, on leave from the Economics Department

at the University of British Columbia.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII

American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold

Author(s):Edwards, Sebastian
Reviewer(s):Richardson, Gary

Sebastian Edwards, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold. Princeton: Princeton University Press, 2018. xxxiii + 252 pp. $30 (cloth), ISBN: 978-0-691-16188-4.

Reviewed for EH.Net by Gary Richardson, Department of Economics, University of California at Irvine.

The risk-free rate of return on investments is often considered to be the yield on United States government debt. “The risk-free rate is hypothetical,” Investopedia indicates, “as every investment has some type of risk associated with it. However, T-bills [United States Treasury debt obligations with a maturity of 52 weeks or less] are the closest investment possible to being risk-free for a couple of reasons.” The first is “the U.S. government has never defaulted on its debt obligations, even in times of severe economic stress.” Similar statements appear in Wikipedia’s entry on the risk-free interest rate as well as in scores of economics and finance textbooks used around the world. Sebastian Edwards’ new book, American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold, questions this concept underlying modern financial markets by asserting that the United States defaulted on federal debt during the 1930s, when it withdrew monetary gold from circulation and abrogated the gold clause in contracts, both public and private.

Before I delve into the details of Edwards’ insightful study, I want to give you an overall assessment of the book It is fascinating, well-written, and thoroughly researched. It provides new perspective on an important era of American history. It discusses the ideas, personalities, politics, economics, and finance underlying the principal policies by which the Roosevelt administration resuscitated the United States economy after the catastrophic contraction of the early 1930s. An academic press published the book, but the clarity of its prose and vividness of the narrative make it accessible to a general audience. The book should and will be widely read. It’s worth pondering and debating, and I will debate some aspects of it later in this review.

Edwards’ book asks provocative questions about fundamental features of the U.S. and international financial systems. The author lists these questions at two points in the book: the end of the introduction and beginning of the conclusion. The lists contain fifteen total queries. A short summary is:
• Did the United States default on federal government debt in 1934 when it abrogated the gold clause for government bonds (particularly the fourth Liberty Bond)?
• Why did the federal government abrogate the gold clause? Was this action necessary?
• Who made the key decisions during this episode and how did they justify their actions?
• What were the consequences for investors and for the economy as a whole, both in the United States and abroad?
• Could this happen again?

Edwards answers these questions over the course of 17 chapters plus an introduction, an appendix, a timeline, and a list describing the men around whom the story revolves. The introduction lays out the issues of interest. Chapters 1 through 15 narrate the story. The narrative revolves around policymakers, such as President Franklin Roosevelt, Senator Carter Glass, and members of the Supreme Court, and the men who advised them, including Roosevelt’s Brain Trust, whose initial members included Raymond Moley and Adolf Berle, law professors from Columbia University and Rexford Tugwell, an economics professor at Columbia. The narrative describes the decisions that these men made (or had to make), their rationales for making these decisions, and the state of knowledge and state of the world at the times the men made these decisions.

The narrative starts in March 1932, during the economic downturn now known as the Great Depression. A few pages describe the poverty and desperation imposed upon people from all walks of life. Nearly a quarter of the labor force experienced unemployment. Commodity prices declined more than half. These declines proved particularly hard on men and women running small businesses, such as family farmers who made up a quarter of the United States population. Declining farm prices accentuated farmers’ debt burden, since the nominal value of debts remained fixed. This forced farmers who wanted to pay their mortgages and crop loans to double production (which was often impossible) or cut consumption (particularly of durable goods like cars, radios, and clothing) — and forced other farmers (and eventually almost all farmers) to stop paying their debts, default on their loans, and face bankruptcy, which often resulted in the loss of lands and livelihoods.

Chapters 1 through 4 cover Roosevelt’s campaign platform and policies and the economic turmoil from November 1932 through February 1933. During these last five months of the Hoover administration, a nationwide panic drained funds from the banking system and gold from the vaults of the Federal Reserve. The public feared for the safety of deposits, and rushed to convert their claims against banks into coins and cash. The public (particularly foreign investors) also feared for the value of the dollar, since they anticipated that the Roosevelt administration might lower the gold content of U.S. currency or leave the gold standard all together, as had Britain and numerous other nations. In March, gold outflows forced the Federal Reserve Bank of New York below its gold reserve requirement. To prevent the New York Fed from shutting its doors, the newly inaugurated President Roosevelt declared a national banking holiday. This segment of the story ends by describing the policies that the Roosevelt administration implemented as it resuscitated the financial system and sparked economic recovery.

This review will not go into details about decisions and the logic underlying them. For that information, you should read the book, which presents the materials cogently and clearly. You may also peruse other recent readable treatments on the topic, including The Defining Moment (Alter, 2006), FDR: The First Hundred Days (Badger, 2008), Nothing to Fear (Cohen, 2009), and Freedom from Fear (Kennedy, 1999). All of these cover similar material and reach similar conclusions. I also recommend the memoirs of Herbert Hoover and Roosevelt’s principal advisors. A list appears in Edwards’ bibliography. To it, I recommend adding the memoir of Jesse Jones, who was head of the Reconstruction Finance Corporation, Fifty Billion Dollars: My Thirteen Years with the RFC (1951).

Chapters 5 through 10 describe the Roosevelt administration’s efforts to help the economy recover from the spring of 1933 through the winter of 1934. The administration believed a key cause of the catastrophic contraction was the devaluation of the dollar and decline in prices — particularly of farm commodities — that occurred during the 1920s and early 1930s. Prices of wholesale goods fell an average of 25% between 1926 and 1933. Consumer prices fell by the same amount. The average price of farm crops fell more than 66%. Declining prices made it difficult for farmers and other producers to earn sufficient profits to pay their debts, which were fixed in nominal terms, forcing families and firms to cut consumption and investment, in order to avoid bankruptcy, or forcing families and firms to default on their debts, which was often worse for them and which also put banks out of business, restricting the availability of credit, triggering banking panics, and leading to further economic contraction. The administration sought to alleviate this cycle of debt-deflation by convincing (or forcing) individuals and firms to redeposit funds in banks, encouraging banks to lend, and refilling the Federal Reserve’s vaults with gold. All of these actions would expand the money supply and eventually raise prices.

The administration also sought to speed the process by directly influencing commodity prices, particularly those traded on international markets, which had fallen substantially due to foreign governments’ decisions to devalue their own currencies, usually by abandoning the gold standard and allowing the price of their currencies to be determined by market forces. The quickest way to raise commodity prices and alter the exchange rate was to change the dollar price of gold. The federal government had lowered and raised gold’s dollar price in the past. The constitution provided Congress with the power to do so. Congress authorized the president to act, by raising the dollar price of gold up to 100% (or synonymously by cutting the gold content of dollar coins up to 50%), with the Thomas Amendment to the Agricultural Adjustment Act in May 1933. The Roosevelt administration used these powers to the utmost, periodically and persistently raising gold’s dollar price from the spring of 1933 through the winter of 1934. Roosevelt’s gold program concluded in January 1934, with the passage of the Gold Reserve Act, which set gold’s official price at $35 per troy ounce.

Gold clauses in contracts impeded this policy. An example was printed on Liberty Bonds: “The principal and interest hereof are payable in United States gold coin of the present standard of value.” Clauses like this were common in public and private contracts. Their intent was to protect creditors from declines in the value of currency or inflation, which is the same phenomenon but stated as an increase in the average price of goods. Gold clauses ensured lenders that they would be repaid with currency or gold coins with the same real value, in terms of the goods and services that they could purchase, as the funds that they had lent.

Gold clauses had a pernicious effect, however, when deflations and devaluation decisions of foreign governments reduced prices and economic activity. Then, gold clauses prevented governments from quickly and effectively remedying the situation by altering the money supply, interest rates, exchange rates, and prices to push the economy back toward equilibrium. In Chapter 16, Edwards admits monetary expansion was the optimal policy to pursue. He “strongly” believes it was the “main force behind the recovery” (p. 188). He indicates, correctly, that this is the consensus of scholars who have studied the issue. He offers no alternative. The Roosevelt administration understood this problem, and on May 29, convinced Congress to void gold clauses in all contracts retroactively and in the future.

Chapters 5 through 10 do a good job of conveying this material and describing the thought-process of the Roosevelt administration as it struggled to make difficult decisions in real time with limited information. The chapters reflect the conventional wisdom found in canonical accounts of this period including Milton Friedman and Anna Schwartz’s (1960) Monetary History of the United States, Peter Temin’s (1989) Lessons from the Great Depression, and Barry Eichengreen’s Golden Fetters (1992). The chapters also do a good job of describing concerns and criticisms of Roosevelt’s recovery plans. Perhaps as a narrative device, the chapters do not tell you who was right. That material appears one hundred pages later in Chapter 16.

Chapters 11 to 15 contain the novel part of the narrative. They describe investors’ reactions to Roosevelt’s gold policies and the abrogation of the gold clause. Investors quickly sued in state and federal courts, demanding that borrowers repay debts with gold coin, as required by gold clauses, rather than currency, as determined by Congress. Courts consistently ruled against plaintiffs, usually indicating that the Constitution gave Congress the power “to coin money and regulate the value thereof” and to determine what was legal tender for the discharge of public and private debts. Plaintiffs appealed these decisions, and the cases quickly reached the Supreme Court.

American Default’s coverage of these court cases is seminal and stimulating. I know the literature on this topic well. As the official Historian of the Federal Reserve System, I wrote essays on “Roosevelt’s Gold Program” and the “Gold Reserve Act of 1934” which appear on the Federal Reserve’s historical web site. I have read much of what scholars have published on this topic. I know of no comparable source for information on these court cases, the arguments presented by the plaintiffs and defendants, and the rationale underlying the Supreme Court’s confusing decision that Congress’s abrogation of the gold in private contracts was constitutional while Congress’s abrogation of the gold clause for government bonds, particularly the Liberty Bonds, was constitutional in some ways but unconstitutional in others, did not harm the plaintiffs, and therefore would not be overturned by the courts.

Now, we get to one point on which I disagree with the author. Edwards clearly believes the United States federal government defaulted on its debts. The Supreme Court equivocated, but generally seemed to think that the United States did not default, and I agree with the Supreme Court. Let me explain.

Merriam-Webster’s dictionary defines a default as either a (1) failure to do something required by duty or law or (2) a failure to pay financial debts. The United States Supreme Court decision in the gold cases indicated that the federal government defaulted in the first sense. It did not fulfill a promise printed on the bonds, which was to literally repay bondholders with United States gold coins at the standard of value that prevailed when the bonds were issued in 1918. At that time, the basic gold coin was the Eagle. It was worth $10 and contained 0.48375 troy ounces of gold and 0.05375 troy ounces of copper. So, a Liberty Bond with a face value of $100 promised upon maturity payment of 10 gold Eagles containing a total of 4.8375 troy ounces of gold and 0.5375 troy ounces of copper. When Liberty Bonds matured in 1938, however, the government gave bondholders neither the Eagles nor the metals that they contained.

The Supreme Court ruled that the federal government did not default in the second sense. The government fully paid its financial debts. The latter conclusion requires explanation, particularly because the book emphasizes the “American Default” aspect of the Supreme Court’s decision. The Supreme Court justified this conclusion based upon two arguments originally advanced by the federal government. The first argument began with the fact that in 1933, the federal government had withdrawn all monetary gold from circulation and paid in return paper currency at the standard of value which had prevailed since 1900. This meant that an individual holding 10 Eagle coins had to give them to the government and accept $100 in paper currency in return. The government argued that Liberty bond holders could and should be treated the same way as everyone else in the United States. In a hypothetical scenario, when the bonds matured, the government would pay bondholders the gold coins as promised, but then the government would also immediately confiscate those coins and compensate the former bondholders with currency at the same rate as everyone else had been compensated a few years before. This hypothetical sequence of transactions was legal. The U.S. Constitution enumerated Congress’s power to determine the standards of coinage and legal tender. These enumerated powers enabled Congress to convert gold coins to paper currency and/or redefine the standards of value and objects accepted as payment for public and private debts. If the government executed this hypothetical sequence of transactions when the bonds matured in 1938, an individual who had purchased a $100 Liberty Bond in 1918 would in the end receive $100 in currency. The Supreme Court ruled that it was acceptable for the government to give that currency directly to the bondholders upon maturity, rather than go to the hassle of giving them gold coins, taking them back, and then paying the currency to them.

To understand the second argument that abrogating the gold clause did not involve a financial default, it may help to step back from the legal technicalities and think of the repayment in an economic sense. The purpose of the gold clause was the protect bond holders from a fall in the value of American currency, a phenomenon known as inflation. The clause promised that individuals who invested in the United States would be repaid with dollars whose real value in terms of goods and services was equivalent to the real value of the dollars with which they purchased the bonds. Did the United States government do this? The answer is yes. The purchasing power of the dollar rose four percent between 1918, when the fourth Liberty Bond was issued, and 1938, when the fourth Liberty Bond matured. So, an American citizen who in 1918 purchased a $100 Liberty Bond received in 1938 funds sufficient to purchase goods and services that would have cost $104 in 1918. The government also paid 4.5% interest each year along the way. So, the government did honor its pledge to maintain the purchasing power of the funds entrusted to it by purchasers of Liberty Bonds and return that to them plus interest.

What about foreigners? They owned many U.S. bonds. The largest group of foreign investors were English. Their position is worth considering. In October 1918, when the Liberty Bonds were issued, the dollar-pound exchange rate was 4.77. An English investor could exchange ₤1 for $4.77 and purchase a $100 Liberty Bond for ₤20.96. In October 1938, when the Liberty Bonds matured, the dollar-pound exchange rate was 4.77. So, an English investor who redeemed his bond for $100 in U.S. currency could convert that into ₤20.96, exactly what they had paid for it, and with those funds, they could buy goods which would have been valued at ₤46.69 in 1918, since the purchasing power of the pound had risen substantially since that time. So, English investors, like many others overseas, made large profits from investing in Liberty Bonds.

Plaintiffs in the gold clause cases before the Supreme Court hoped that their suit would allow them to reap even higher returns. They argued that the government should be required to pay them with old gold coins, like the Eagle, at the 1918 standard of value, and then they should be able to convert the Eagles to dollars at the price established by the Gold Reserve Act of 1934 ($35 per troy ounce of gold). The government countered that this plan was infeasible. There was not enough gold in the U.S. to pay gold to all Liberty Bond holders. That plan was also illegal. The law no longer allowed the public to own, save, or spend monetary gold. In that case, the plaintiffs argued, they should receive the amount which would result from a hypothetical sequence of transactions where the government gave them gold coins at the 1918 standard of value (as stated on the bonds) and then immediately converted that gold to currency at the 1934 standard of value. This sequence would pay $166.67 on a $100 Liberty Bond upon maturity in 1938, a sum sufficient to purchase goods and services which would have cost $174.19 in 1918. The majority of the Supreme Court rejected this claim and referred to it as unjust enrichment.

Chapter 16 discusses the consequences of the abrogation of the gold clause. At the time, opponents of the policy contended that its effects could be catastrophic. Contracts would not be trusted. Creditors would no longer want to extend loans. Interest rates would rise. Investment would fall. The economy would stagnate. Edwards looks for evidence of these ailments in data on investment, borrowing, bonds, stocks, prices, interest rates, and output and finds none. After abrogation, the government actually found it easier to borrow, rather than harder. Edwards concludes that there is “no evidence of distress or dislocation in the period immediately following the abrogation, or the Court ruling. … it is possible that if the gold clause had not been abrogated, output and investment would have recovered faster than they did, and that the costs of borrowing would have declined even more. Those outcomes are possible, but in my view, highly unlikely” (p. 195).

The reason abrogation had no detectable impact, Edwards concludes, was that it was an excusable default. Excusable defaults occur under circumstances “when the market understands that a debt restructuring is, indeed, warranted, and beneficial for (almost) everyone involved in the marketplace” (p. 197), when the restructuring is done according to existing legal rules, and when the default is largely a domestic matter, with few foreigners involved. Excusable defaults do not stigmatize sovereigns, since they do not change borrowers’ expectations of sovereigns’ probability of repaying future debts. I agree with Edwards that the abrogation of the gold clause fit these circumstances, and I argued, in the preceding paragraphs, that the abrogation fit another classic characteristic of an excusable default. Bondholders received payment equal to (or better than) what they expected when the debt was issued. Since past holders of Liberty Bonds received the repayments that they expected when they purchased the bonds on origination in 1918, despite the tremendous shocks to the United States and world economies between then and maturity in 1938, future bondholders had no reason to doubt that their expectations would not be met.

Could it happen again? The author asks that question at the beginning and end of the book (and in the title to Chapter 17), because he says “among all questions, [it was] the one that kept coming back again and again” (p. 201). In emerging economies, Edwards indicates, “situations that mirror what happened in the United States during 1933-1935 have occurred recently in a number of … countries, and it is almost certain that they will continue to arise in the future” (p 203). Examples from the recent past include Argentina, Mexico, Turkey, Russia, Indonesia, and Chile. Advanced economies are not immune from these economic forces. In 2008, Iceland faced “a gigantic external crisis with a massive devaluation and a complete collapse of the banking sector. It took almost ten years for Iceland to recover” (p. 205). Greece continues to struggle with a similar situation. So do other European nations, such as Portugal, Italy, and Spain. These nations may be tempted to leave the Eurozone, reintroduce independent currencies, and devalue their exchange rate in order to speed economic recovery. But, any nation that tries (or is forced) to do this will struggle with contracts, all of which are written requiring payment in Euros. If these are rewritten to permit repayment in new currencies of lesser value, the issue is sure to end up in domestic and foreign courts as well as the World Bank’s tribunal for international investment disputes.

While the rest of the world may be in danger of experiencing events similar to the U.S. abrogation crisis of the 1930s, Edwards argues that “it is almost impossible that something similar will happen again in the United States” (p. 201). The main reasons are the change in the monetary system and the exchange rate regime. The United States’ exchange rates are now determined by market forces. Gold no longer underlies the monetary system. Most contracts are denominated in lawful currency, not gold, commodities, or foreign currency. Even if a repeat is extremely unlikely, the chance of the United States restructuring its debt, Edwards argues, is not zero. The federal debt outstanding is now nearly equal to gross domestic product. A tenth of the debt is fixed in real terms, because upon maturity, bondholders receive a premium payment linked to increases in the Consumer Price Index. The implicit debt for future entitlement, particularly Medicare, Medicaid, and Society Security, exceeds 400 percent of gross domestic product. There is little agreement on how to pay for these promises, Edwards notes, and at some point in the not-too-distant future, the U.S. government may be forced to restructure these payments. This potential crisis, Edwards argues, differs from the crisis of the 1930s, because the abrogation crisis stemmed from deflation, exchange rates, and the structure of the monetary system. The modern problem arises from promises made in the present for the future delivery of services.

On all of these points, I agree with Edwards. I am, however, less hopeful for the future. The unsustainable federal debt is not an accident. It was consciously created by Republican politicians to justify reducing (or eliminating) future federal entitlements. With Republicans in control of all three branches [When the review was published by Cato, this was true. However, Republicans now control only half of Congress] of the federal government, taxes cut, deficits up, and a recession on the horizon, the day of reckoning may be upon us in the near future. I anticipate a massive abrogation of federal medical and retirement entitlements within the next decade and sooner if Republicans retain control of Congress and the Presidency through 2020.

The roots of the past and current crises may have more in common than Edwards indicates. Most payments for federal entitlement programs are indexed for inflation. Federal entitlement obligations are, in other words, guaranteed in real terms, just like payments for Liberty Bonds one hundred years ago. They cannot be adjusted on aggregate by monetary policies that generate inflation. The can only be adjusted through the legislature and the courts. On this point, Edwards’ American Default ends on a high note. The ability of the United States to deal with the crisis of the 1930s and the abrogation of the gold clause demonstrates the strength of our legislative and judicial institutions. Given these, it is likely that our nation will be able to overcome future federal financial restructurings. Memories of those events will fade. The will be forgotten just like the events that Edwards masterfully recounts in his book, and America’s federal debt will remain the risk-free standard for the rest of the world.

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Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.

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Richardson, Gary, Michael Gou, and Alejandro Komai. “Gold Reserve Act of 1934.” Federal Reserve History Web Site. Retrieved June 26, 2018.

Richardson, Gary, Michael Gou, and Alejandro Komai. “Roosevelt’s Gold Program.” Federal Reserve History Web Site. Retrieved June 26, 2018.

Temin, Peter. Lessons from the Great Depression. MIT Press, 1989.

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This review was originally published in Regulation, Fall 2018.
Gary Richardson was the editor of the Federal Reserve’s historical web site,, on which he wrote a series of articles about the Roosevelt Administration’s gold policies. He is the author of numerous academic articles on the history of money, banking, and the Federal Reserve.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII