is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

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.


Bayoumi, Tamim, Barry Eichengreen, and Mark P. Taylor, eds. Modern Perspectives on the Gold Standard. Cambridge: Cambridge University Press, 1996.

Bernanke, Ben, and Harold James. “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison.” In Financial Market and Financial Crises, edited by R. Glenn Hubbard, 33-68. Chicago: University of Chicago Press, 1991.

Bett, Virgil M. Central Banking in Mexico: Monetary Policies and Financial Crises, 1864-1940. Ann Arbor: University of Michigan, 1957.

Bloomfield, Arthur I. Monetary Policy under the International Gold Standard, 1880 1914. New York: Federal Reserve Bank of New York, 1959.

Bloomfield, Arthur I. Short-Term Capital Movements Under the Pre-1914 Gold Standard. Princeton: International Finance Section, Princeton University, 1963.

Board of Governors of the Federal Reserve System. Banking and Monetary Statistics, 1914-1941. Washington, DC, 1943.

Bordo, Michael D. “The Classical Gold Standard: Some Lessons for Today.” Federal Reserve Bank of St. Louis Review 63, no. 5 (1981): 2-17.

Bordo, Michael D. “The Classical Gold Standard: Lessons from the Past.” In The International Monetary System: Choices for the Future, edited by Michael B. Connolly, 229-65. New York: Praeger, 1982.

Bordo, Michael D. “Gold Standard: Theory.” In The New Palgrave Dictionary of Money & Finance, vol. 2, edited by Peter Newman, Murray Milgate, and John Eatwell, 267 71. London: Macmillan, 1992.

Bordo, Michael D. “The Gold Standard, Bretton Woods and Other Monetary Regimes: A Historical Appraisal.” Federal Reserve Bank of St. Louis Review 75, no. 2 (1993): 123-91.

Bordo, Michael D. The Gold Standard and Related Regimes: Collected Essays. Cambridge: Cambridge University Press, 1999.

Bordo, Michael D., and Forrest Capie, eds. Monetary Regimes in Transition. Cambridge: Cambridge University Press, 1994.

Bordo, Michael D., and Barry Eichengreen, eds. A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform. Chicago: University of Chicago Press, 1993.

Bordo, Michael D., and Finn E. Kydland. “The Gold Standard as a Rule: An Essay in Exploration.” Explorations in Economic History 32, no. 4 (1995): 423-64.

Bordo, Michael D., and Hugh Rockoff. “The Gold Standard as a ‘Good Housekeeping Seal of Approval’. ” Journal of Economic History 56, no. 2 (1996): 389- 428.

Bordo, Michael D., and Anna J. Schwartz, eds. A Retrospective on the Classical Gold Standard, 1821-1931. Chicago: University of Chicago Press, 1984.

Bordo, Michael D., and Anna J. Schwartz. “The Operation of the Specie Standard: Evidence for Core and Peripheral Countries, 1880-1990.” In Currency Convertibility: The Gold Standard and Beyond, edited by Jorge Braga de Macedo, Barry Eichengreen, and Jaime Reis, 11-83. London: Routledge, 1996.

Bordo, Michael D., and Anna J. Schwartz. “Monetary Policy Regimes and Economic Performance: The Historical Record.” In Handbook of Macroeconomics, vol. 1A, edited by John B. Taylor and Michael Woodford, 149-234. Amsterdam: Elsevier, 1999.

Broadberry, S. N., and N. F. R. Crafts, eds. Britain in the International Economy. Cambridge: Cambridge University Press, 1992.

Brown, William Adams, Jr. The International Gold Standard Reinterpreted, 1914- 1934. New York: National Bureau of Economic Research, 1940.

Bureau of the Mint. Monetary Units and Coinage Systems of the Principal Countries of the World, 1929. Washington, DC: Government Printing Office, 1929.

Cairncross, Alec, and Barry Eichengreen. Sterling in Decline: The Devaluations of 1931, 1949 and 1967. Oxford: Basil Blackwell, 1983.

Calleo, David P. “The Historiography of the Interwar Period: Reconsiderations.” In Balance of Power or Hegemony: The Interwar Monetary System, edited by Benjamin M. Rowland, 225-60. New York: New York University Press, 1976.

Clarke, Stephen V. O. Central Bank Cooperation: 1924-31. New York: Federal Reserve Bank of New York, 1967.

Cleveland, Harold van B. “The International Monetary System in the Interwar Period.” In Balance of Power or Hegemony: The Interwar Monetary System, edited by Benjamin M. Rowland, 1-59. New York: New York University Press, 1976.

Cooper, Richard N. “The Gold Standard: Historical Facts and Future Prospects.” Brookings Papers on Economic Activity 1 (1982): 1-45.

Dam, Kenneth W. The Rules of the Game: Reform and Evolution in the International Monetary System. Chicago: University of Chicago Press, 1982.

De Cecco, Marcello. The International Gold Standard. New York: St. Martin’s Press, 1984.

De Cecco, Marcello. “Gold Standard.” In The New Palgrave Dictionary of Money & Finance, vol. 2, edited by Peter Newman, Murray Milgate, and John Eatwell, 260 66. London: Macmillan, 1992.

De Cecco, Marcello. “Central Bank Cooperation in the Inter-War Period: A View from the Periphery.” In International Monetary Systems in Historical Perspective, edited by Jaime Reis, 113-34. Houndmills, Basingstoke, Hampshire: Macmillan, 1995.

De Macedo, Jorge Braga, Barry Eichengreen, and Jaime Reis, eds. Currency Convertibility: The Gold Standard and Beyond. London: Routledge, 1996.

Ding, Chiang Hai. “A History of Currency in Malaysia and Singapore.” In The Monetary System of Singapore and Malaysia: Implications of the Split Currency, edited by J. Purcal, 1-9. Singapore: Stamford College Press, 1967.

Director of the Mint. The Monetary Systems of the Principal Countries of the World, 1913. Washington: Government Printing Office, 1913.

Director of the Mint. Monetary Systems of the Principal Countries of the World, 1916. Washington: Government Printing Office, 1917.

Dos Santos, Fernando Teixeira. “Last to Join the Gold Standard, 1931.” In Currency Convertibility: The Gold Standard and Beyond, edited by Jorge Braga de Macedo, Barry Eichengreen, and Jaime Reis, 182-203. London: Routledge, 1996.

Dowd, Kevin, and Richard H. Timberlake, Jr., eds. Money and the National State: The Financial Revolution, Government and the World Monetary System. New Brunswick (U.S.): Transaction, 1998.

Drummond, Ian. M. The Gold Standard and the International Monetary System, 1900 1939. Houndmills, Basingstoke, Hampshire: Macmillan, 1987.

Easton, H. T. Tate’s Modern Cambist. London: Effingham Wilson, 1912.

Eichengreen, Barry, ed. The Gold Standard in Theory and History. New York: Methuen, 1985.

Eichengreen, Barry. Elusive Stability: Essays in the History of International Finance, 1919-1939. New York: Cambridge University Press, 1990.

Eichengreen, Barry. “International Monetary Instability between the Wars: Structural Flaws or Misguided Policies?” In The Evolution of the International Monetary System: How can Efficiency and Stability Be Attained? edited by Yoshio Suzuki, Junichi Miyake, and Mitsuaki Okabe, 71-116. Tokyo: University of Tokyo Press, 1990.

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

Eichengreen, Barry. “The Endogeneity of Exchange-Rate Regimes.” In Understanding Interdependence: The Macroeconomics of the Open Economy, edited by Peter B. Kenen, 3-33. Princeton: Princeton University Press, 1995.

Eichengreen, Barry. “History of the International Monetary System: Implications for Research in International Macroeconomics and Finance.” In The Handbook of International Macroeconomics, edited by Frederick van der Ploeg, 153-91. Cambridge, MA: Basil Blackwell, 1994.

Eichengreen, Barry, and Marc Flandreau. The Gold Standard in Theory and History, second edition. London: Routledge, 1997.

Einzig, Paul. International Gold Movements. London: Macmillan, 1929. Federal Reserve Bulletin, various issues, 1928-1936.

Ford, A. G. The Gold Standard 1880-1914: Britain and Argentina. Oxford: Clarendon Press, 1962.

Ford, A. G. “Notes on the Working of the Gold Standard before 1914.” In The Gold Standard in Theory and History, edited by Barry Eichengreen, 141-65. New York: Methuen, 1985.

Ford, A. G. “International Financial Policy and the Gold Standard, 1870-1914.” In The Industrial Economies: The Development of Economic and Social Policies, The Cambridge Economic History of Europe, vol. 8, edited by Peter Mathias and Sidney Pollard, 197-249. Cambridge: Cambridge University Press, 1989.

Frieden, Jeffry A. “The Dynamics of International Monetary Systems: International and Domestic Factors in the Rise, Reign, and Demise of the Classical Gold Standard.” In Coping with Complexity in the International System, edited by Jack Snyder and Robert Jervis, 137-62. Boulder, CO: Westview, 1993.

Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University, Press, 1963.

Gallarotti, Giulio M. The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880-1914. New York: Oxford University Press, 1995.

Giovannini, Alberto. “Bretton Woods and its Precursors: Rules versus Discretion in the History of International Monetary Regimes.” In A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, edited by Michael D. Bordo and Barry Eichengreen, 109-47. Chicago: University of Chicago Press, 1993.

Gunasekera, H. A. de S. From Dependent Currency to Central Banking in Ceylon: An Analysis of Monetary Experience, 1825-1957. London: G. Bell, 1962.

Hawtrey, R. G. The Gold Standard in Theory and Practice, fifth edition. London: Longmans, Green, 1947.

Hawtrey, R. G. Currency and Credit, fourth edition. London: Longmans, Green, 1950.

Hershlag, Z. Y. Introduction to the Modern Economic History of the Middle East. London: E. J. Brill, 1980.

Ingram, James C. Economic Changes in Thailand, 1850-1970. Stanford, CA: Stanford University, 1971.

Jonung, Lars. “Swedish Experience under the Classical Gold Standard, 1873-1914.” In A Retrospective on the Classical Gold Standard, 1821-1931, edited by Michael D. Bordo and Anna J. Schwartz, 361-99. Chicago: University of Chicago Press, 1984.

Kemmerer, Donald L. “Statement.” In Gold Reserve Act Amendments, Hearings, U.S. Senate, 83rd Cong., second session, pp. 299-302. Washington, DC: Government Printing Office, 1954.

Kemmerer, Edwin Walter. Modern Currency Reforms: A History and Discussion of Recent Currency Reforms in India, Puerto Rico, Philippine Islands, Straits Settlements and Mexico. New York: Macmillan, 1916.

Kemmerer, Edwin Walter. Inflation and Revolution: Mexico’s Experience of 1912- 1917. Princeton: Princeton University Press, 1940.

Kemmerer, Edwin Walter. Gold and the Gold Standard: The Story of Gold Money – – Past, Present and Future. New York: McGraw-Hill, 1944.

Kenwood, A.G., and A. L. Lougheed. The Growth of the International Economy, 1820 1960. London: George Allen & Unwin, 1971.

Kettell, Brian. Gold. Cambridge, MA: Ballinger, 1982.

Kindleberger, Charles P. A Financial History of Western Europe. London: George Allen & Unwin, 1984.

Kindleberger, Charles P. The World in Depression, 1929-1939, revised edition. Berkeley, University of California Press, 1986.

Lampe, John R. The Bulgarian Economy in the Twentieth Century. London: Croom Helm, 1986.

League of Nations. Memorandum on Currency and Central Banks, 1913-1925, second edition, vol. 1. Geneva, 1926.

League of Nations. International Statistical Yearbook, 1926. Geneva, 1927.

League of Nations. International Statistical Yearbook, 1928. Geneva, 1929.

League of Nations. Statistical Yearbook, 1930/31.Geneva, 1931.

League of Nations. Money and Banking, 1937/38, vol. 1: Monetary Review. Geneva.

League of Nations. The Course and Control of Inflation. Geneva, 1946.

Lindert, Peter H. Key Currencies and Gold, 1900-1913. Princeton: International Finance Section, Princeton University, 1969.

McCloskey, Donald N., and J. Richard Zecher. “How the Gold Standard Worked, 1880 1913.” In The Monetary Approach to the Balance of Payments, edited by Jacob A. Frenkel and Harry G. Johnson, 357-85. Toronto: University of Toronto Press, 1976.

MacKay, R. A., ed. Newfoundland: Economic Diplomatic, and Strategic Studies. Toronto: Oxford University Press, 1946.

MacLeod, Malcolm. Kindred Countries: Canada and Newfoundland before Confederation. Ottawa: Canadian Historical Association, 1994.

Moggridge, D. E. British Monetary Policy, 1924-1931: The Norman Conquest of $4.86. Cambridge: Cambridge University Press, 1972.

Moggridge, D. E. “The Gold Standard and National Financial Policies, 1919-39.” In The Industrial Economies: The Development of Economic and Social Policies, The Cambridge Economic History of Europe, vol. 8, edited by Peter Mathias and Sidney Pollard, 250-314. Cambridge: Cambridge University Press, 1989.

Morgenstern, Oskar. International Financial Transactions and Business Cycles. Princeton: Princeton University Press, 1959.

Norman, John Henry. Complete Guide to the World’s Twenty-nine Metal Monetary Systems. New York: G. P. Putnam, 1892.

Nurkse, Ragnar. International Currency Experience: Lessons of the Inter-War Period. Geneva: League of Nations, 1944.

Officer, Lawrence H. Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior. Cambridge: Cambridge University Press, 1996.

Pablo, Martín Acena, and Jaime Reis, eds. Monetary Standards in the Periphery: Paper, Silver and Gold, 1854-1933. Houndmills, Basingstoke, Hampshire: Macmillan, 2000.

Palyi, Melchior. The Twilight of Gold, 1914-1936: Myths and Realities. Chicago: Henry Regnery, 1972.

Pamuk, Sevket. A Monetary History of the Ottoman Empire. Cambridge: Cambridge University Press, 2000.

Pani?, M. European Monetary Union: Lessons from the Classical Gold Standard. Houndmills, Basingstoke, Hampshire: St. Martin’s Press, 1992.

Powell, James. A History of the Canadian Dollar. Ottawa: Bank of Canada, 1999.

Redish, Angela. Bimetallism: An Economic and Historical Analysis. Cambridge: Cambridge University Press, 2000.

Rifaat, Mohammed Ali. The Monetary System of Egypt: An Inquiry into its History and Present Working. London: George Allen & Unwin, 1935.

Rockoff, Hugh. “Gold Supply.” In The New Palgrave Dictionary of Money & Finance, vol. 2, edited by Peter Newman, Murray Milgate, and John Eatwell, 271 73. London: Macmillan, 1992.

Sayers, R. S. The Bank of England, 1891-1944, Appendixes. Cambridge: Cambridge University Press, 1976.

Sayers, R. S. The Bank of England, 1891-1944. Cambridge: Cambridge University Press, 1986.

Schwartz, Anna J. “Alternative Monetary Regimes: The Gold Standard.” In Alternative Monetary Regimes, edited by Colin D. Campbell and William R. Dougan, 44-72. Baltimore: Johns Hopkins University Press, 1986.

Shinjo, Hiroshi. History of the Yen: 100 Years of Japanese Money-Economy. Kobe: Kobe University, 1962.

Spalding, William F. Tate’s Modern Cambist. London: Effingham Wilson, 1926.

Spalding, William F. Dictionary of the World’s Currencies and Foreign Exchange. London: Isaac Pitman, 1928.

Triffin, Robert. The Evolution of the International Monetary System: Historical Reappraisal and Future Perspectives. Princeton: International Finance Section, Princeton University, 1964.

Triffin, Robert. Our International Monetary System: Yesterday, Today, and Tomorrow. New York: Random House, 1968.

Wallich, Henry Christopher. Monetary Problems of an Export Economy: The Cuban Experience, 1914-1947. Cambridge, MA: Harvard University Press, 1950.

Yeager, Leland B. International Monetary Relations: Theory, History, and Policy, second edition. New York: Harper & Row, 1976.

Young, John Parke. Central American Currency and Finance. Princeton: Princeton University Press, 1925.

Citation: Officer, Lawrence. “Gold Standard”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL

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

Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922-1938

Author(s):Humphrey, Thomas M.
Timberlake, Richard H.
Reviewer(s):Thies, Clifford F.

Published by EH.Net (October 2019)

Thomas M. Humphrey and Richard H. Timberlake, Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922-1938. Washington: Cato Institute, 2019. xix + 201 pp. $21.21 (hardcover), ISBN: 978-1-948647-55-7.

Reviewed for EH.Net by Clifford F. Thies, School of Business, Shenandoah University.

Thomas M. Humphrey was a long-time research economist for the Federal Reserve Bank of Richmond with a penchant for the history of thought concerning monetary economics, and Richard H. Timberlake is a professor emeritus at the University of Georgia whose writings on money mainly concern the constitution of money, money and the U.S. Constitution, and other institutional arrangements for money. Their book is meant to debunk the “well-established” view that a slavish devotion to the gold standard condemned the United States and much of the rest of the world to the Great Depression. Instead of gold, the authors argue, the problem was the Real Bills Doctrine. Regardless of how persuasive they are in shifting the blame from gold to the Real Bills Doctrine, they tell a tale delicious in its detail, naming the names of those responsible.

According to Humphrey and Timberlake, John Law’s Bank of Mississippi was the first attempt to implement the Real Bills Doctrine (pp. 9-11). This bank, and other land bank schemes such as characterized the U.S. colonial period, may have had some connection to the Real Bills Doctrine, such as antecedents. However, the doctrine says that an appropriate backing for bank demand liabilities is short-term, “self-liquidating” loans collateralized by goods in transit and other such evidences of real activity. Land, not being self-liquidating, would not be appropriate. In addition to the heterogeneity of land, the value of land is speculative because it is based on the present value of its future services. Speculative assets, according to the Real Bills Doctrine, are not appropriate to back bank demand liabilities. Nor would state-issued or railroad-issued bonds be good backing for banknotes, as was mandated by various states during the Free Bank Era, because their values, too, are speculative. Nor would U.S. Treasury bonds as was allowed during the National Bank Era. The market values of long-term bonds and mortgages, even those that are substantially free of the risk of default, are dependent on interest rates and, therefore, are not appropriate to back bank demand liabilities. The misadventure of John Law has been repeated many times since his day, sometimes with banks, sometimes with depository institutions, and most recently with “shadow banks.” But land banks are more like the opposite of the Real Bills Doctrine, than an example.

A good example of the Real Bills Doctrine in conjunction with an operational gold standard was the chartered banks of Louisiana from 1845 to 1861. These banks backed their demand liabilities with a specie reserve of one-third and the remainder by bills of exchange, discounted commercial paper, and other short-term loans. Crucially, as Humphrey and Timberlake repeatedly state in conjunction with the bank panics of the 1930s, the specie reserve of the Louisiana chartered banks was only an initial reserve. During a bank panic, banks could pay out the specie in their vault. If the run on the banks wasn’t directly ended by the paying out of specie, the coming-due of a bank’s short-term loans (which could be paid in the banknotes of that bank or in specie) would either sop up the remaining banknotes in circulation or provide the specie needed to redeem those banknotes. None of the chartered banks of Louisiana suspended during the Panic of 1857, while the several Free Banks of the state suspended (albeit for a short time). Of course, Louisiana being on the losing side of the Civil War couldn’t provide the model for the National Bank Era. New York with its Free Banking system (based on bond collateral) did. As Humphrey and Timberlake correctly argue, the Real Bills Doctrine by itself wasn’t the culprit for the Great Depression (p. xiii). When operated in conjunction with an operational gold standard, as the Louisiana chartered banks did, the doctrine is innocuous. It is when the Real Bills Doctrine operates in a vacuum, without a commodity-money anchor, that something bad will inevitably happen.

The reason something bad will inevitably happen with the Real Bills Doctrine detached from an operational gold standard is, at one level, obvious, and, at another level, sophisticated. The obvious problem with the doctrine is that it links one nominal variable (the money stock) to another nominal variable (the money-value of qualifying loans), leaving the price level indeterminant (p. 5). The sophisticated argument, captured in the one diagram in Humphrey and Timberlake’s book (p. 24), is that the system is unstable. A move to inflation brings about more inflation, and a move to deflation brings about more deflation. During a hyperinflation, because the velocity of money accelerates, there is a shortage of money, requiring more money to prevent recession. Knut Wicksell called this or something like it the accumulation process; Milton Friedman, the accelerationist hypothesis; and, Friedrich Hayek, a tiger by the tail. The book describes this instability in the case of the German hyperinflation of the 1920s (p. 22). We are currently seeing this instability in Venezuela. The key argument of the book is that this instability works in both directions, downward as well as upward, and explains the deflation that accompanied the Great Depression, as well as various episodes of hyperinflation.

Part of the reason the money supply spirals downward as well as upward is because of fractional reserve banking (p. 28). Every dollar withdrawn from a bank results in a multiple contraction of the money stock. At this point, it is important to distinguish between what is today called base money, or M0, and what is called the money stock or money supply, or M1. Humphrey and Timberlake use the term “common money” to refer to the latter (and perhaps something more). The Real Bills Doctrine justifies fractional reserve banking because it says that real bills and not merely base money can be used to back bank demand liabilities. During the 1920s and early ‘30s, the monetary base consisted of gold coins and Gold Certificates, Silver Certificates and U.S. Notes outside the Fed, Federal Reserve Notes, reserves of banks held on deposit at the Fed, and limited legal tender subsidiary coins, mostly silver. The U.S. Notes were fixed in their supply, as essentially were also the Silver Certificates and coins. The dynamics of the fractional reserve system played out in the fractional backing of Federal Reserve Notes and bank reserves by gold, and by the fractional backing of bank demand and time liabilities by the base money in their vaults and their reserves held on deposit at the Fed. During good times, there was a tendency for the banking system to increase the money multiplier, and during bad times, to decrease it. By tracking the monetary aggregates, central banks can counteract these destabilizing tendencies, but the Fed did not track the monetary aggregates at the time. William McChesney Martin during the 1950s characterized the practice of counteracting destabilizing tendencies by saying the Fed should “lean against the wind.” But, unabashed Real Bills-central bankers run with the wind, instead of lean against the wind.

The real culprit precipitating a downturn in the monetary aggregates, however, wasn’t an automatic tendency. It was an explicit decision to suppress “speculation” made by a narrow majority of the Board of Governors of the Federal Reserve led by Adolph C. Miller, overriding the Federal Reserve Bank Presidents, the Federal Advisory Council, and many prominent private bank presidents. Pages 77-85 are the most engaging part of the book. Although the authors do not say so explicitly, by using terminology such as “an evangelical crusade,” they imply that Miller was from the populist and anti-bank wing of the Democratic Party. From the diary of a member of the Federal Reserve Board who served with him, it appears Miller was self-righteous and dogmatic. This is the impression I got reading the referenced articles by Miller justifying the actions of the Fed. That and a whiff of a backstop defense that the Board was compelled to take the actions it took because of the Federal Reserve Act of 1913.

According to the authors, it was the Fed’s actions to suppress “speculation” that precipitated the Stock Market Crash of 1929, and it was the Fed’s slavish devotion to the Real Bills Doctrine that allowed the monetary aggregates to subsequently spiral downward, taking the economy with it. But, this story, even if its fixes the blame, might not fully exonerate gold. Historically, the problems of inflation and deflation have usually been associated with war. In this country, the problems of post-war adjustment include the messy resumption that followed the War of 1812, and the “Grow to Gold” policy following the Civil War that involved a protracted period of deflation and a series of financial panics. Following the Great War, subsequently renamed World War I, there was a significant post-war deflation, but prices were stabilized at a level higher than pre-war. A second bout of deflation might have been necessary or perhaps there was a more creative solution. As other nations sought to return to the Gold Standard, something was going to have to give. The unfinished job of post-war adjustment didn’t mean, however, that we were condemned to the utter calamity that was the Great Depression.

Clifford F. Thies is the Eldon R. Lindsey Chair of Free Enterprise and Professor of Economics and Finance at Shenandoah University. He has recently written on debt repudiation by Mississippi (The Independent Review).

Copyright (c) 2019 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 2019). All EH.Net reviews are archived at

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