The Gold Standard. Today, the term denotes something that represents the highest level of quality in its category
.
Gold, in all its glory, has been coveted, fought for and valued for thousands of years. It was used as a sacred ornament and projected the wealth and status of monarchs and nobles. And since ancient times when the Lydians minted the first gold coins around 550 BC, the yellow metal has played an important role in the monetary system.
But what is the history of the Gold Standard and could it be revalued today?
Table of Contents:
Why has the world established a Gold Standard?
Copper, silver, gold, and alloys such as electrum were the basis of commerce and currency for thousands of years, but their weight represented a significant problem.
To address this situation, paper money was created in the form of payment promises, with the first uses that were little more than IOU (I Owe You, “I owe you”). It was only in the seventh century in China that commercial corporations began to issue deposit receipts that eliminated the need for merchants to carry large quantities of coins
for wholesale transactions.
The origin of paper money
These notes, lighter than their metal counterparts, have become popular among traders along the Silk Road between China and the Middle East. In the end, the concept of printed money returned to Europe through travelers such as Marco Polo and William of Rubruck, who moved along the route in the
13th century.
However, the concept of paper money didn’t catch on in Europe for another 400 years, when Sweden issued the first banknotes in 1661. These notes were redeemable in amounts of coins by banks, which meant that merchants no longer had to carry large amounts of copper and silver, which were heavy and easy
to steal.
The problem of unregulated banknotes
Outside Sweden, a lack of regulation over who could issue banknotes meant that states, cities, commercial organizations, and anyone with a press could print money. As a result, counterfeit banknotes were created by unscrupulous people, undermining confidence in paper money
and contributing to high inflation rates.
It wasn’t until England passed the Bank Charter Act of 1844 that a modern-style central bank began to appear, with strict regulations on which entities could print paper money. The act limited the ability of commercial banks to issue notes, giving that power to the Bank of England, and required that new banknotes issued by the Bank of England be backed at a rate of “three pounds, seventeen shillings, and nine pence per ounce of
standard gold.”
The transition to a gold-based system
While this world power moved towards a gold-based system, other nations remained on bimetallic systems, establishing a relationship between gold and silver to allow interoperability stabilized by France.
The tipping point
The tipping point came in 1871, when Germany, after its victory over France in the Franco-Prussian War, switched from a silver currency system to a currency backed solely by gold. This move was considered a preventive move to avoid being excluded from fixed-rate systems formed among industrialized nations
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Advantages and disadvantages of the Gold Standard
In theory, the international Gold Standard provided an intrinsic mechanism of stability in the financial system, since trade imbalances would self-correct. However, it was far from perfect, as individual economies had little control over their economic difficulties
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The End of the Gold Standard
The legacy of the Gold Standard
The Gold Standard has left an indelible mark on world economic history. Although it is no longer in force, its implications and impact continue to be the subject of discussion among economists and historians
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