This September marked the 85th anniversary of the UK leaving the gold standard in 1931. Similarly, August 2016 marked the 45th anniversary of the end of the gold standard in the USA. Gold was one of the central ways for a country to control the value of its currency. Here, we look at the rise and fall of the gold standard and why we no longer use it…
Until fairly recently gold played a central role in the workings of the global economy, helping governments to control the value of their currencies.
Back in the nineteenth century, the gold standard was used to fix the price at which gold can be bought and sold.
In Britain, the use of silver as the main monetary metal had been falling for years, progressively driven down by wars and international trade deficits.
Then, in 1717, Sir Isaac Newton, as master of The Royal Mint, set up a new mint ratio that dramatically reduced the amount of silver in circulation, an act which was followed by the introduction of the new gold Sovereign in 1816.
These factors led to the establishment of the world’s first formal gold specie standard in 1821, in which the monetary unit was tied to the value of circulating gold coins.
It was one type of gold standard, contrasting with the gold bullion standard and the gold exchange standard:
- Gold bullion standard – gold coins are not circulated, but gold bullion can be bought for a set amount of paper and other forms of money
- Gold exchange standard – used by countries without large gold reserves to fix exchange rates to the currency of another country that uses a gold standard. The gold exchange standard usually does not involve the circulation of gold coins. The main feature of the gold exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses a gold standard (specie or bullion). This is regardless of what type of notes or coins are used as a means of exchange. This creates a de facto gold standard, where the value of the means of exchange has a fixed external worth in terms of gold that’s independent of the inherent value of the exchange itself.
Following Britain’s adoption of the gold standard, several other countries began to follow suit – first Canada in 1853 and then Newfoundland in 1865.
The US established its own standard in 1873, using the eagle as its unit, while Germany followed the America’s lead in the same year with the introduction of the gold mark.
For years, the gold standard was successful in providing a way for countries to keep their exchange rates stable and encourage the growth of international trade.
The end of the Gold Standard
But the onset of the First World War put the system under great strain, as high levels of inflation drove the value of paper money down well below the value of gold.
Confidence in the gold standard began to wane, though many countries continued to back it, with the British Government reaffirming its commitment in 1926.
What finished the standard off as a way to maintain the value of a currency, however, was the Great Depression of 1929 that sent the global economy into meltdown.
Britain left the gold standard in 1931 followed by the US in 1971, and instead the international monetary system came to be based on the dollar. As of 2013, there are no countries still using the practice.
But many countries do maintain the gold reserves built up during the years of the gold standard. And recent calls by leading Republicans in the US suggest that the system may not be completely resigned to the history books yet.