3 Quick Questions about the Gold Standard

What was the gold standard?

The gold standard was a monetary system that pegged currencies to the value of gold.

 

Why was the gold standard adopted?

Short answer: The gold standard developed in Great Britain first (other countries followed later), as a response to a quickly growing economy with the need for stable currency.

Long answer: Leading up to the early 19th century, Great Britain had been on a bimetallic monetary system. Gold and silver coins circulated side-by-side in the economy with an official exchange rate between the two, for example in Great Britain one guinea (a gold coin) was valued at 21 shillings (a silver coin). However, at times foreign market exchange rates between gold and silver made it profitable to export one or the other, causing shortages in the circulating coinage.

Napoleon had been successful with the introduction of the gold franc and the promise to pay France’s soldiers, contractors and debtors in gold francs. In 1816, Great Britain adopted the gold standard and introduced the gold sovereign as unit of account. All notes and silver coins were exchangeable to gold at all times and this was made clear by the text ‘We promise to pay the bearer on demand the sum of…’ which can still be read on British banknotes (despite the fact that this is no longer true).

 

Was the gold standard good or bad?

The gold standard filled an important purpose during a time of great economic expansion in Great Britain and other industrialising nations of the Western World. The standardisation of payments across borders and unquestionable trust in currencies backed by gold acted as catalysts towards economic activity and growth.

If the gold standard acted as a catalyst for economic growth during the industrialisation, it hindered countries from recovery during the Great Depression of the 1930s. There are countless of arguments for and against the gold standard, its uses and effects on the world. Some call the gold standard a terrible, limiting monetary system and others call it a perfect, responsible system. I would like to say that it is neither and both. There is no perfect monetary system, especially not in a changing world. The gold standard filled its purpose up until the First World War, then the world changed enough to make it ineffective.