The Gold Standard

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Podcast Transcript

For a period of about 200 years, and really intensely for less than 50 years, the world’s monetary system functioned on a gold standard. 

During the gold standard, the world basically functioned for the first time under a single global currency. 

Economists have been debating the merits of the system ever since. 

Learn more about the gold standard, how it started, and how it ended, on this episode of Everything Everywhere Daily.


Not that long ago I did an episode on the history of money and mentioned that it was just the first in a series of episodes I was going to do on monetary history.

This is the second episode in that series. 

If you remember back to my episode on the history of money, I mentioned that gold and silver had been used as money almost since something we could point to as money existed. 

So, you might be thinking, didn’t the gold standard start thousands of years ago?

The answer to that is no. Almost everywhere you could find gold as a medium of exchange you also found silver and other metals in use as well.  

This ancient system is known as de facto bimetallism. 

In ancient Rome for example, they had gold coins known as the Aureus, however, this wasn’t used for common transactions. The Roman sestertius and denarius were silver coins that were used for everyday transactions. 

The fact is there just isn’t as much gold in the world as there is silver. The ratio of silver to gold is one of the oldest economic statistics that we have. The ratio has run anywhere from 10 to 1, to 100 to 1, depending on where in history you are looking. 

I checked just before writing this episode and the value of gold is currently about 80x that of silver.

Gold couldn’t be used as the sole specie for money in a world where the value was in the metal in the coin itself. To purchase something small and mundane like a loaf of bread would require a gold coin so small that it would be very difficult to mint and easy to lose. 

The gold standard is defined as a system where only one meta, gold, is used as the base for the currency.

The gold standard actually got its start by accident. In 1717 the Royal Mint of Great Britain set the exchange rate for gold and silver incorrectly and overvalued gold. 

The person who made this mistake was none other than Isaac Newton. 

Yes, that Isaac Newton. The guy who figured out how gravity worked, the laws of motion, light, the inventor of calculus, and the guy who solved the Brachistochrone Problem in a single evening, was appointed the head of the Royal Mint, and he made a big error.

He issued a report which was subsequently turned into a royal decree which forbid the exchange of gold guineas for more than 21 silver shillings.

What ended up happening is that all imports to England were paid for with silver, and all exports ended up being paid for with gold. 

Here I need to explain something you have learned in Economics 101 courses known as Gresham’s Law. 

Gresham’s Law simply states that bad money will drive out good money.  If there are two different types of money in circulation, people will keep the good money and spend the bad money to get rid of it. 

This can manifest itself in different ways. If you have ever gotten a bill that was dirty and ripped, you probably would want to pass it off to someone else as quickly as possible. Likewise, in an era of precious metal coins, if a coin was dinged up and worn, you’d probably want to get rid of that too.

In the case of Britain, the exchange rate was such that it resulted in a silver shortage and most of the silver left the country.  Foreigners paid for British goods with gold because they could get a better exchange rate elsewhere.

This put England on a de facto gold standard. There were still silver coins in circulation that were legal, but the forced gold/silver exchange rate made it such that gold was really the only game in town. 

This de facto gold standard was made official by the United Kingdom in the early 19th century after the Napoleonic wars. 

What made it possible to adopt a gold standard was an improvement in the banking system and paper currency. 

If you recall from my episode on the history of money paper currency had been around for over a thousand years in China. However, that didn’t mean that people necessarily liked or trusted it. 

Paper money was easier to debase and counterfeit than coins were. However, advancements in printing and banking eventually made it possible for paper money to represent smaller units of gold, which would otherwise have been impractical to use as coins. 

These notes could then be converted on-demand at a bank for a set amount of gold. This convertibility was really the heart of the gold standard. Anyone who held paper notes could take those notes to a bank and redeem them for a set value of gold coins. 

This was formalized in Britain by the Peel Banking Act of 1844 which limited the issuance of banknotes to only British national banks, primarily the Banks of England and Scotland, and required a reserve in gold for any notes which were issued. 

The Peel Banking Act solved the problems that bimetallism had with Gresham’s Law, as well as the practical problems of using gold as a unit of currency. 

Britain extended this gold standard to its colonies and dominions including Australia, Canada, New Zealand, and the West Indies. 

The year 1844 was important because it came just before events that changed the monetary landscape of the world: the California Gold Rush of 1849 and the Australian Gold Rush of 1850.

In the several centuries prior to these gold booms, the production of silver had vastly surpassed that of gold, primarily from Spanish silver mines in the new world. 

The new influx of gold influenced the French government which had a policy of issuing 20 Franc gold coins if the gold to silver ratio was below 15.5 to 1, and issuing 5 Franc silver coins if the ratio was above 15.5 to 1.

Likewise, the United States had a ratio of 15 to 1.

All the new gold flooding world markets lowered the gold to silver ratio and ushered in the minting of new gold coins. Both France and the United States still had silver currency, but like Britain in 1717, they were now on a de facto gold standard. 

This created an enormous trading block of countries that were now all in effect using the same currency. The only difference between a dollar, pound, and franc was the amount of gold it represented. 

Switzerland, Belgium, Portugal, and all of their colonies went over to a gold standard in the 1850s and 1860s. 

The gold to silver ratio eventually went back over 15.5, but by that time, the gold block had become solidified. 

Many economists will point to the classical gold standard era as beginning in 1873. 

In 1873 the German Empire moved from the silver Thaler to the gold Gulden. The Latin Monetary Union, which included Spain, Italy, and many other European countries, also moved to gold. 

It also saw the adoption of the Coinage Act of 1873 in the United States. This prevented owners of silver bullion from converting it into silver coinage but allowed gold bullion to be converted to coins. 

This solidified the United States’ de facto gold standard, even though silver coins were still legal.

The Coinage Act of 1873 was one of the most contentious issues of late 19th-century American politics. The gold standard was the major issue in the presidential election of 1896 when William Jennings Bryant gave his famous “Cross of Gold” speech.

Scandinavia, the Netherlands, the Austrian-Hungarian Empire, and Russia all converted to gold in the following years. 

One problem that developed was in countries that still had outstanding silver coins. The gold standard decreased demand for silver which reduced its price. On top of that, the 1860s and 70s saw a surge in silver supply hit the market from the Comstock Lode in Nevada

The silver coins floating around now had silver that was worth less, but could be converted to gold at face value. 

This was solved by replacing the silver coins with banknotes and token coins which could be converted to gold.

The classical era of the gold standard which began in 1873 ended in 1914 with the onset of World War I.

The main countries involved in the conflict needed a tremendous amount of money to fund their war effort. Taxes alone wasn’t enough, so Britain and Germany both abandoned the gold standard so they could print money to fund the war.

Inflation spiked in most belligerent countries including the United States which did not abandon the gold standard.

Most nations, except Germany, went back to the gold standard in some form after the war. Germany had most of its gold reserved taken in reparations after the Treaty of Versailles. This was an indirect cause of the hyperinflation seen during the Weimar Republic just a few years later.

The next big blow to the gold standard was the Great Depression. 

There has been a great deal of debate amongst economists as to the role the gold standard played during the great depression. Many think that the gold standard made central banks unable to expand the money supply to deal with the crisis. 

All over the world, there were bank runs where people tried to get their money out in the form of gold.

The UK abandoned the gold standard in 1931. 

On April 5, 1933, President Franklin Roosevelt issued Executive Order 6102 which made the private ownership of gold bullion illegal. Citizens had to sell their gold to the government for $20.67 per ounce.

In 1934, the Gold Reserve Act nationalized all gold by requiring all banks to send gold to the US Treasury in exchange for gold certificates. The president also then devalued the price of gold from $20.67 to $35 per ounce.

Italy, Belgium, and other countries abandoned the gold standard in 1934 as well. 

What the Great Depression didn’t finish, the Second World War certainly did. Many countries completely broke with gold and established fiat currencies to fund their war efforts, just like they did during the first world war. 

The last country to abandon the gold standard was Switzerland which stopped backing its currency with gold in 1999.

The gold standard is still the subject of debate to this day. There are some economists who think it was the core cause of the Great Depression. There are others who think that the bank failures of the 1930s were sparked by Britain dropping the gold standard causing a credit bust. 

There are some who think we should return to a gold standard and some who think we absolutely should not. 

However, gold still wasn’t totally dead as an instrument of monetary policy. In 1944, 730 delegates representing 44 Allied nations met at the Mount Washington Hotel in the small town of Bretton Woods, New Hampshire.

There they hammered out in person a new international monetary regime which govern the post war world. It wasn’t quite a gold standard, but gold did have a big part to play. 

The Bretton Woods System will be subject of part three in this series. 


Everything Everywhere Daily is an Airwave Media Podcast. 

The executive producer is Darcy Adams.

The associate producers are Thor Thomsen and Peter Bennett.

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