Globalization and economic history - the gold standard

The manufacture of coins from a hoard of precious metals is a process as old as time. Even today, it is reflected in the names of currencies that recall the quantity of precious metal they once contained.

This applies, for example, to the British pound and the penny, which descend directly from the Roman denarius, and were both units of weight. As currency, they have dominated payment from the medieval to the modern era. Other metals such as copper or gold were either too heavy or too light to be able to compete with it.

Before the fourteenth century, gold was used in international trade in Europe, while the money continued to reign in current transactions. It was not until the seventeenth century that things evolved and the yellow metal began to be increasingly used in national and international exchanges.

In the late nineteenth century, the gold standard was finally established as the basis of the international monetary system. How does this system work? What were its main characteristics? What are the reasons for its decline which began in the early 1910s? In other words, what were the strengths and constraints of the system based on gold mono-metallism?

The system of the gold standard during the nineteenth century is characterized by its double nature nationally and internationally.
First, internally, the system relies on a circulation of money convertible into gold. In this regard, there were two major opposing views at the time.

Ricardo argues the Currency Principle, which advocates a strict equivalence between the stock of gold held by central banks and the amount of bank notes in circulation. Thus, the yellow metal is the mainstay of paper money, while guaranteeing stability.

Therefore, money creation is seen strictly limited to increasing the stock of gold.Convertibility is complete, the main country to have adopted this principle is the UK, including the Bank Charter Act of 1844. Currency Principle is opposed to the Banking Principle, based on a ticketing much more flexible and takes into account primarily the needs of the economy. France opted for the principle, however, by introducing an emission ceiling.

In the world market, the gold standard is characterized by a widespread adoption of the gold mono metallism internally, as well as a reference more and more common to metal for international business transactions. Initially, gold is not alone in this role. Indeed, with the notable exception of England, which adopted the gold monometallism in the early nineteenth century, most major industrial countries have actually adopted bimetallism (gold and silver).

Britain has become the first world economic power and the first source of funding that encouraged a significant way for these countries, which has already realized after numerous exchanges, to follow this example. The failure in 1866 of the Latin Union had tried to revive bimetallism symbolizes the triumph of gold mono metallism.

Therefore, it was not until the last quarter of the nineteenth century that one can truly speak of a universal gold standard. As stated by Professor Serge Bosc in one of his books, "all currencies are convertible into gold, gold is a common denominator for different currencies.”

Tags: Gold standard; history of economic globalization; money creation; gold mono metallism