paper gold

Gold standard

The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The gold standard is not currently used by any government, having been replaced completely by fiat currency, and private currencies backed by gold are rare.

Gold standards should not be confused with their historical predecessor, "gold-coin standards", wherein taxes are payable in either gold coins or overvalued, government-minted, less expensive, coins.

The main purpose of either government money system has historically been to provide seigniorage, or money-creation profit, to governmental leaders in order to provide them with general purchasing power during emergencies, especially those leaders who are legislatively constrained and therefore unable to raise taxes in order to execute the defense commitments that are required for the survival of their states (Thompson, 1974.)

Gold standards replaced gold-coin standards in the 17th-19th centuries in the West as the extent of defensive warfare expanded to where the gold-coin standards were no longer sufficient to the task. A similar history generated a gold standard in China from the 9th through the early 17th century.

Early gold-coin standards

Government-minted gold and silver coins were first used in ancient Lydia in the late 7th century B.C. The burgeoning democratic city-states of Classical Greece soon thereafter introduced similar gold-coin standards, which rapidly spread Westward to most of the city-states republics, including Rome. In the heyday of the Athenian empire, the city's silver tetradrachm was the first coin to achieve "international standard" status in Mediterranean trade. Silver remained the most common monetary metal used in ordinary transactions until the 20th century.

The Persian Empire collected taxes in gold and minted its own gold coin, known in the West as the dareikos δαρεικός in Greek, or daricus in Latin. When Persia was conquered by Alexander the Great, this gold became the basis for the gold coinage of Alexander's Macedon empire and those of his Diadochi. The vast gold hoard of the Persian kings was put into monetary circulation, triggering the first known "worldwide" inflation event. Ancient Rome minted two important gold coins: the aureus, which was ~7 grams of gold alloyed with silver, and the smaller solidus, which weighed 4.4 grams, of which 4.2 was gold. Roman and Byzantine coins were frequently alloyed with other metals of much lower value to create the seigniorage necessary for a rational system of government money.

The Roman Emperor Gallienus, who ruled from 253 to 268, introduced a monetary reform in which surface-overvalued coins were no longer accepted for tax payments, resulting in inflation: for the surface overvaluation of an emergency coinage would soon degenerate to the point where the coinage simply traded for its metallic value, thereby eliminating the ability of the senate-constrained government to collect seigniorage at critical times. Remarkably, the position was not remedied until after the fall of the Empire and the times of Justinian in the East and Theodoric the Great, the first of the Germanic (Ostrogothic) emperors in the West.

The dinar and dirham were gold and silver coins, respectively, originally minted by the Persians. The Caliphates in the Islamic world adopted these coins, starting with Caliph Abd al-Malik (685–705).

In 1284 the Republic of Venice coined the ducat, its first solid gold coin. Other coins, the florin, noble, grosh, złoty, and guinea, were also introduced at this time by other European states to facilitate growing trade.

Beginning with the conquest of the Aztec and Inca Empires, Spain had access to stocks of new gold for coinage in addition to silver. The wide availability of milled and cob gold coins made it possible for the West Indies to make gold the only legal tender in 1704. The circulation of Spanish coins was later to create the unit of account for the United States, the "dollar", based on the Spanish silver real, and Philadelphia's currency market was to trade in Spanish colonial coins.

The crisis of silver currency and bank notes (1750–1870)

In the late 18th century wars and trade with China, which sold many trade goods to Europe but had little use for European goods, drained silver from the economies of Western Europe and the United States. Coins were struck in smaller and smaller amounts, and there was a proliferation of bank and Demand Notes used as money.

In the 1790s Britain suffered a massive shortage of silver coinage and ceased to mint larger silver coins. It issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, Britain began a massive recoinage program that created standard gold sovereigns and circulating crowns, half-crowns, and eventually copper farthings in 1821. In 1833, Bank of England notes were made legal tender, and redemption by other banks was discouraged. In 1844 the Bank Charter Act established that Bank of England notes, fully backed by gold, were the legal standard. According to the strict interpretation of the gold standard, this 1844 Act marks the establishment of a full gold standard for British money.

There were 113.00159 grains (7.32g) of gold to one pound sterling. The exact equivalent was that 1869 sovereigns could be minted from 40 pounds troy of crown gold (11/12 fine).

The U.S. adopted a silver standard based on the "Spanish milled dollar" in July 1785. This was codified in the 1792 Mint and Coinage Act. This began a long series of attempts for United States to create a bimetallic standard for the US Dollar, which was to continue until the 1930s. Because of the huge debt taken on by the US Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins. The US Treasury was put on a strict "hard money" standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1846, which legally separated the accounts of the Federal Government from the banking system. Following Gresham's law, silver poured into the US, which traded with other silver nations, and gold moved out. In 1853, the US reduced the silver weight of coins, to keep them in circulation.

Establishment of the international gold standard

When Germany became a unified country following the Franco-Prussian War; it established the mark. Rapidly most other nations followed suit. Gold became a transportable, universal and stable unit of valuation, and the world's dominant economy, the United Kingdom, had a longstanding commitment to the gold standard. See Globalization.

Dates of adoption of a gold standard

Throughout the post-Civil War decade of the 1870s deflationary and depressionary economics created periodic demands for silver currency. However, attempts to introduce such currency generally failed, and continued the general pressure towards a gold standard. By 1879, only gold coins were accepted through the Latin Monetary Union, composed of France, Italy, Belgium, Switzerland and later Greece, even though silver was, in theory, a circulating medium.

Gold standard from peak to crisis (1901–1932)

Suspending gold payments to fund the war

As in previous major wars under its gold standard, the British government suspended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The government later called these notes banknotes, which are different from US Treasury notes. The United States government took similar measures. After the war, Germany, having lost much of its gold in reparations, could no longer coin gold "Reichsmarks" and moved to paper currency, although the Weimar Republic later introduced the "rentenmark" and later the gold-backed reichsmark in an effort to control hyperinflation.

As had happened after previous major wars, the UK was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill. Although a higher gold price and significant inflation had followed the wartime suspension, Churchill followed tradition by resuming conversion payments at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, causing deflation throughout those countries of the British Empire and Commonwealth using the Pound Sterling. But the rise in demand for gold for conversion payments that followed the similar European resumptions from 1925 to 1928 meant a further rise in demand for gold relative to goods and therefore the need for a lower price of goods because of the fixed rate of conversion from money to goods. Because of these price declines and predictable depressionary effects, the British government finally abandoned the standard September 20, 1931. Sweden abandoned the gold standard in October 1931; and other European nations soon followed. Even the U.S. government, which possessed most of the world's gold, moved to cushion the effects of the Great Depression by raising the official price of gold (from about $20 to $35 per ounce) and thereby substantially raising the equilibrium price level in 1933-4.

Depression and World War II

British hesitate to return to gold standard

During the 1939–1942 period, the UK depleted much of its gold stock in purchases of munitions and weaponry on a "cash and carry" basis from the U.S. and other nations. This depletion of the UK's reserve convinced Winston Churchill of the impracticality of returning to a pre-war style gold standard. John Maynard Keynes, who had argued against such a gold standard, became increasingly influential. Nevertheless, his theories were rejected by the 1944 Bretton Woods Agreement, which established the IMF and an international gold standard based on convertibility of the various national currencies into a U.S. dollar that was in turn convertible into gold.

Post-war international gold standard (1946–1971)

After the Second World War, a system similar to the Gold Standard was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the US dollar. The US promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold. However, under the fiscal strain of the Vietnam War, President Richard Nixon eliminated the fixed gold price in 1971, causing the system to break down.


The history of money consists of three phases: commodity money, in which actual valuable objects are bartered; then representative money, in which paper notes (often called 'certificates') are used to represent real commodities stored elsewhere; and finally fiat money, in which paper notes are backed only by use of' "lawful force and legal tender laws" of the government, in particular by its acceptability for payments of debts to the government (usually taxes).

Commodity money is inconvenient to store and transport and is subject to hoarding. It also does not allow the government to control or regulate the flow of commerce within their dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other specie were retained as its backing.

Gold was a common form of representative money due to its rarity, durability, divisibility, fungibility, and ease of identification, often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve.

The Gold Standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no innate value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A US silver certificate, for example, could be redeemed for an actual piece of silver.

Representative money and the Gold Standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. That system eventually collapsed in 1971, at which time all nations had switched to full fiat money.

Former US Federal Reserve Chairman Alan Greenspan once argued, before the advent of monetarism, that

"under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.


  • A currency needs to satisfy three functions to become a true representation of transactions between people.
  • Medium of exchange
  • Store of value
  • Delivery of value (energy)

For gold currencies to be valid, the issuer should be able to deliver "value / energy" on redemption of currency. Otherwise, gold currency has no mechanism to satisfy the "delivery of value" function to be real currency.

Gold does not have inherent value/energy so exchange value has to be negotiated during each transaction. During times of scarcities like famine, exchange value of gold goes down drastically.

  • The total amount of gold that has ever been mined has been estimated at around 142,000 tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $7.6 trillion is in circulation or in deposit (although international banking currently practices fractional reserves). Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce (or $1,000 per 1/2 ounce) effectively raising the value of gold to $8 trillion. Gold standard advocates consider this to be an acceptable and necessary risk.
  • Fluctuations in the amount of gold that is mined could cause inflation, if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the Great Depression.
  • It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, giving central banks fewer options to respond to economic crises.
  • Some have contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak. For example, some believe the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency.
  • If a country wanted to devalue their currency, it would produce sharper changes than the smooth declines seen in fiat currencies.


The theory of the gold standard rests on the idea that maximal increases in governmental purchasing power during wartime emergencies require post-war deflations, which would not occur without monetary institutions like the gold standard, which insist upon return to pre-war price-levels and therefore deflationary wartime expectations (Thompson, 1995).

Differing definitions of gold standard

If the monetary authority holds sufficient gold to convert all circulating money, then this is known as a 100% reserve gold standard, or a full gold standard. In some cases it is referred to as the Gold Specie Standard to more easily separate it from the other forms of gold standard that have existed at various times. The 100% reserve standard is generally considered unworkable because the quantity of gold in the world is too small to sustain current worldwide economic activity and the "right" quantity of money (i.e. one that avoids either inflation or deflation) is not a fixed quantity, but varies continuously with the level of commercial activity. The currencies or banknotes having Gold standard were the old German Reichsmarks, Yugoslavia Dinars, Turkish Liras, Brazil Cruzeiros, Croatia Dinars, Polish Złoty, Argentina Peso Leys, Angola Kwanzas reajastodos, Zaire Zaires and Bolivia Bolivanos.

In an international gold-standard system, which may exist in the absence of any internal gold standard, gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. Under the Bretton Woods system, these were called "SDRs" for Special Drawing Rights.

Stability offered by gold standard

The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. It may tend to create certainty in international trade by providing a fixed pattern of exchange rates. Under the classical international gold standard, disturbances in price levels in one country would be wholly or partly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism." At the time of the Bretton Woods agreement, it was believed that markets were always internally clear; Say's Law. However, in practice, wages, not capital, depreciate in price first.

Mundell-Fleming model

According to modern neo-classical synthesis economics, the Mundell-Fleming Model describes the behavior of currencies under a gold standard. Since the value of the currencies is fixed by the par value of each currency to gold, the remaining freedom of action is distributed between free movement of capital, and effective monetary and fiscal policy. One reason that most modern macro-economists do not support a return to gold is the fear that this remaining amount of freedom would be insufficient to combat large downturns or deflation.

Advocates of a renewed gold standard

The return to the gold standard is supported by many followers of the Austrian School of Economics, objectivists and libertarians largely because they object to the role of the government in issuing fiat currency through central banks.

Few lawmakers today advocate a return to the gold standard, other than adherents of the Austrian school and some supply-siders. However, many prominent economists have expressed sympathy with a hard currency basis, and have argued against fiat money, including former US Federal Reserve Chairman Alan Greenspan (himself a former objectivist) and macro-economist Robert Barro. Greenspan famously argued the case for returning to a gold standard in his 1966 paper "Gold and Economic Freedom", in which he described supporters of fiat currencies as "welfare statists" hell-bent on using monetary printing presses to finance deficit spending. He has argued that the fiat money system of today has retained the favorable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place.

The current global monetary system relies on the US dollar as an “anchor currency” by which major transactions, such as the price of gold itself, are measured. Currency instabilities, inconvertibility and credit access restriction are a few reasons why the current system has been criticized. A host of alternatives have been suggested, including energy-based currencies, market baskets of currencies or commodities; gold is merely one of these alternatives.

In 2001 Malaysian Prime Minister Mahathir bin Mohamad proposed a new currency that would be used initially for international trade between Muslim nations. The currency he proposed was called the islamic gold dinar and it was defined as 4.25 grams of 24 carat (100%) gold. Mahathir Mohamad promoted the concept on the basis of its economic merits as a stable unit of account and also as a political symbol to create greater unity between Islamic nations. The purported purpose of this move would be to reduce dependence on the United States dollar as a reserve currency, and to establish a non-debt-backed currency in accord with Islamic law against the charging of interest. However, to date, Mahathir's proposed gold-dinar currency has failed to become an accomplished fact.

Gold as a reserve today

During the 1990s Russia liquidated much of the former USSR's gold reserves, while several other nations accumulated gold in preparation for the Economic and Monetary Union. The Swiss Franc left a full gold-convertible backing. However, gold reserves are held in significant quantity by many nations as a means of defending their currency, and hedging against the U.S. Dollar, which forms the bulk of liquid currency reserves. Weakness in the U.S. Dollar tends to be offset by strengthening of gold prices. Gold remains a principal financial asset of almost all central banks alongside foreign currencies and government bonds. It is also held by central banks as a way of hedging against loans to their own governments as an "internal reserve". Approximately 19% of all above-ground gold is held in reserves by central banks.

Both gold coins and gold bars are widely traded in deeply liquid markets, and therefore still serve as a private store of wealth. Some privately issued currencies, such as digital gold currency, are backed by gold reserves.

In 1999, to protect the value of gold as a reserve, European Central Bankers signed the Washington Agreement on Gold which stated that they would not allow gold leasing for speculative purposes, nor would they "enter the market as sellers" except for sales that had already been agreed upon.

See also


"The Gold Standard: Causes and Consequences,"[Earl Thompson], Encyclopedia of Business Cycles, David Glasner, Ed.,[Garland Publishing, 1995, pp. 267-272.

  • The Gold Standard in Theory and History, Barry Eichengreen (Editor), Marc Flandreau, 1997, ISBN 0415150612
  • The Gold Standard and Related Regimes : Collected Essays (Studies in Macroeconomic History), Michael D. Bordo (Editor), Forrest Capie (Editor), Angela Redish (Editor), 1999, ISBN 0521550068
  • A Retrospective on the Classical Gold Standard, 1821–1931 (National Bureau of Economic Research Conference Report), Michael D. Bordo (Editor), Anna J. Schwartz (Editor), 1984, ISBN 0226065901
  • Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior. Lawrence H. Officer, Cambridge University Press, 1996
  • Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (NBER Series on Long-Term Factors in Economic Development), Barry Eichengreen, 1996, ISBN 0195101138
  • Money and Politics: European Monetary Unification and the International Gold Standard (1865–1873) Luca Einaudi 2001
  • Keynes, the Liquidity Trap and the Gold Standard: A Possible Application of the Rational Expectations Hypothesis, Robert Marks 1995
  • Ideology and the Evolution of Vital Economic Institutions: Guilds, The Gold Standard, and Modern International Cooperation Earl A. Thompson, Charles R. Hickson, 2000
  • Gold Standard and Employment Policies between the Wars, Sidney Pollard Ed. 1970
  • Stability of International Exchange: Report on the Introduction of the Gold-Exchange Standard into China and Other Silver-Using Countries, Commission on International Exchange, 2001
  • Ken Elks' series on British Coinage
  • Banking in Modern Japan Research Division of the Fuji Bank, 1967
  • Bordo, Michael D. "Bimetallism". In The New Palgrave Encyclopedia of Money and Finance edited by Peter K. Newman, Murray Milgate and John Eatwell. New York: Stockton Press, 1992.
  • Gold Standard and the International Monetary System, 1900–1939, Ian M. Drummond 1983
  • The Gold Standard in Theory and Practice, RG Hawtrey, Longmans and Green
  • Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848–1873 Marc Flandreau 2003
  • Cyclopædia of Political Science, Political Economy, and the Political History of the United States by the Best American and European Writers, John Lalor, 1881
  • The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison Ben Bernanke, Harold James 1990
  • The World Currency Crisis by Murray Rothbard
  • The Downfall of the Gold Standard Gustav Cassel 1966
  • Currency Convertibility: The Gold Standard and Beyond Jorge Braga de Macedo (Editor) 1996
  • Deceit of the Gold Standard and of Gold Monetization, William H. Russell 1982
  • Gold, Prices and Wages under the Greenback Standard Wesley Clair Mitchell
  • Gold Standard Illusion: France, the Bank of France, and the International Gold Standard, 1914–1939 Kenneth Moure
  • Modern Perspectives on the Gold Standard Tamim Bayoumi (Editor), Mark P. Taylor (Editor), 1997
  • Keynes, John M. 1925; The Economic Consequences of Mr. Churchill (Criticism of returning to the gold standard at the pre-war level – )
  • A Treatise on Money, John Maynard Keynes 1930
  • Credibility of the Interwar Gold Standard, Uncertainty, and the Great Depression J. Peter Ferderer 1999
  • Monetary Standards in the Periphery: Paper, Silver and Gold,1854–1933, Pablo Martin Acena (Editor), Jaime Reis (Editor), 2000
  • History of the Bank of England The Bank of England updated 2004
  • Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880–1914 Giulio M Gallarotti
  • Canada and the Gold Standard: Balance of Payments Adjustments under Fixed Exchange Rates 1871–1913 Trevor Dick, John E. Floyd 1992
  • A.G. Kenwood & A.L. Lougheed (1992). The growth of the international economy 1820–1990. Routledge. London.. ISBN 91-44-00079-0.
  • Richard Hofstadter (1996). The Paranoid Style in American Politics and Other Essays. Harvard University Press. Harvard.. ISBN 0-674-65461-7.
  • Gold - The Once and Future Money, Nathan Lewis, John Wiley and Sons ISBN 0-470-04766-8
  • Thompson, Earl A., "Taxation and National Defense," Journal of Political Economy, July/August 1974, pp. 755-782, esp. p. 758, Note 4.

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