This is the proposed entry for the gold standard in the glossary I am writing.
There will be another entry on the myths that the gold standard still gives rise to. That is not ready to share as yet because getting it right is proving to be hard to do.
Comments are welcome, which is the reason for publishing this now.
This term refers to a method of attributing value to a currency issued by a country. It was in widespread use until the 1920s and 30s. It finally disappeared from any common use when the USA abandoned the gold standard in August 1971.
When jurisdictions developed their own currencies as an indication of their own sovereignty the need for a method of comparing value between different currencies was required to facilitate international trade. This was created by requiring that there be a fixed exchange rate between the value of a jurisdiction's currency and an ounce of gold, hence the term ‘gold standard'.
To achieve this outcome, it was then decided that as a general rule a country could only issue new currency if it had gold reserves sufficient to back the currency that it put into circulation. Given that gold reserves were usually in short supply this restricted the issue of new currency. This approach also provided that currency which was in circulation with a value based upon its convertibility into gold, which was an asset assumed to have universal appeal.
As a result, by restricting new money supply the gold standard not only provided for the relatively easy exchange of currencies used in the course of trade but also provided a mechanism that was intended to restrict the ability of a government to create new money (see separate entries on money and money creation), so reducing the risk of inflation arising from the creation of new currency by a government.
A consequence of this was that governments were constrained with regards to their ability to run government surpluses and deficits (see separate entries). If a government ran a deficit it necessarily injected new money into the economy for which it was responsible but to do so it had to either secure that money from third-parties or alternatively secure new supplies of gold either by mining it or as a result of success in international trade.
The significance of the last two points should not be ignored. The role of the gold standard in promoting the growth of colonies to secure access to gold and to increase overseas financial markets for goods and services produced in the governing country had important consequences almost none of which stand to the credit of any country which undertook such activity.
Presuming that new gold was not available, the only mechanism available to a government to secure the currency that it needed to support a deficit when the value of money was linked to that of available gold resources was by borrowing existing money in circulation. As such, whilst the gold standard was in operation governments were necessarily obliged to borrow the currency for which they were responsible from those who might own it. This meant that the governments in question were necessarily indebted to the financial markets that might supply this currency to them, and to the various demands of those markets with regard to the payment of interest, leaving them vulnerable to the vagaries of such markets and sentiment within them.
Since 1971, when the gold standard was eventually abandoned, and since the introduction of floating exchange rates (see separate entry) (which means that almost no currency is now fixed in value against any other) the constraints that the gold standard created have disappeared. All major and most other economies in the world now use a fiat currency (see separate entry). This means that the currency in use in a country only has value because of the legal decree of the government of that jurisdiction declaring it to be its legal tender and, more practically, because its value is backed by the ability of that country to raise future taxation revenues. This capacity is partnered by the ability of the government to command its central bank to make payment to anyone to whom funds might be owing using newly created money, if necessary. In this situation, there is no reason for a government to borrow from financial markets.
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I like it. Clear and understandable.
Separately, is there a simpler way to refer to related glossary items, perhaps by using an * and a description at the end that * = related term?
When the glossary is live they will have a hyperlink
I have just heard that most of the problems in doing this have been solved
This sounds OK to me but as well valuing a currency was it also used to denote a country’s solvency (he asks somewhat innocently)?
Maybe…
This is not my area of expertise, so I don’t have much to add to this, save to mention that the period of the classical gold standard of the 19th to 20th century needs to be understood as a historical convenience for countries at a time when there was enough gold available for it to work (particularly after the gold rushes in California and Australia in the 1840s and 1850s) and when it made sense for them to emulate the gold standard of the UK, then the global hegemon, to facilitate international trade. It ceased to be relevant when the next global hegemon went off the gold standard a century later.
The Wikipedia article seems to set the scene reasonably well: https://en.wikipedia.org/wiki/Gold_standard #
And there was an “In Our Time” just over a year ago too: https://www.bbc.co.uk/programmes/m0013hh7
In a sense, for the last 50 years, the modern form of gold – the commodity from which everything can be valued – has been oil.
But neither an economy based on the price of oil nor one linked to the value of gold represents some god-given inevitability or ideal. Do we seriously think the best way to value everything is by reference to the availability of stuff we dig out of the ground?
Andrew
Thanks for these
I will take the points on board
But I am not keen to reproduce Wikipedia
Richard
“… as a general rule a country could only issue new currency if it had gold reserves sufficient to back the currency that it put into circulation”
Not sure this is quite correct. The US held nothing like sufficient reserves to back USD in issue in 1971 (or indeed much earlier). I would prefer something along the lines…
“… a country could only issue new currency if receivers of that currency were willing to accept and hold it. Willingness to accept/hold currency (instead of gold) is a trade off between convenience and the risk of non-convertibility. For most countries that meant having sufficient gold reserves to back a very large part of currency in circulation. However, for some global powers economic and military muscle meant that substantially more currency was in issue than backed by gold reserves; first, these were the currencies of global trade so offered great convenience and second, holders were confident that any risk to convertibility could be dealt with… “at gun point” is necessary.
Strong
But worth adding…
I have some work to do, which is why I am doing this
I am hoping m ost entries are nothing like this difficult, but there are many that are
This is a big task
An example of a country issuing currency beyond what its gold reserves would indicate is the U.S. during the First World War. (See ” Birth of a market the U.S. Treasury securities market from the Great War to the Great Depression “, Garbade, Kenneth D.
The U.S. debt went from $2 billion to $20 billion between 1917 and 1920. This was accomplished by the Treasury/Federal Reserve/Private Banks using the banking system, all the while the U.S. was technically still on the gold standard. But since the U.S. was also running trade surpluses against the rest of the world, there was no demand from the conversion of dollars to gold.
Also, I would take issue with the use of the passive voice with respect to the adoption of the gold standard. This was very much an imperial project of Great Britain.
Noted
I will bring the role of the British empire more clearly into this
I did British Social and Economic History for O level and we had to learn the 1844 Banking Act was another reform to regulate the economy. My teacher mentioned a fiduciary issue. He added that it kept having to be increased as the economy grew but ‘you probably won’t get a question on it.’
I remembered the word -my memory was good then -but only recently researched it. The Act allowed £14 million of notes to be issued above the level backed by gold. Gold was just too impractical and the number of notes in circulation kept being raised as the economy grew but needed a vote in the House to allow it. In the First World War gold payments were suspended and all notes became in effect ‘fiduciary’. The periodic votes are like the US Congress keeps having to raise the debt limit , and the Republicans warn of dire inflationary consequences -unless they are in office, in which case, it’s OK.
It seems to me that the gold standard had a deflationary effect and limited the economic activity that could otherwise have taken place. Thus the Depression of the 1930s was partly, at least, self inflicted misery. We did come off in 1931 which was of some benefit but the thinking seems to have persisted in the newspapers up to the present day. Some Right wing Americans still arguing for it.
Keynes called it a ‘barbarous relic’ and I think he was right.
You hint that I need to discuss the Bradbury pound…and you may well be right
Thanks
I think what i was hinting at but didn’t think through this morning was that the Gold Standard provided a neat economic theory. But in the real world money was ‘printed’ -issued in excess of reserves-as well.
Devotion to abstract ideas often results in bending reality to theory-and feeling virtuous in doing so. Reference Jeremy Hunt talking about ‘sound money.’ And John Redwood blaming ‘printing money’ for the inflation.
Agreed
Very clear.
Should there be more emphasis on the insistence (by a government) that its citizens pay their taxes only in their government’s currency?
OK. Noted.
The price of oil is highly volatile, as we have recently seen again, owing to supply and demand imbalance for a product which is globally essential. It’s easy to see the appeal of linking the value of a currency to something like gold which has no serious practical use, and is therefore less responsive to supply issues.
The first episode of The Gold on TV yesterday shows what a big deal it was trying to smuggle three tons of stolen gold back into the market following the Brink’s-Mat robbery in 1983. And aren’t today’s actors strong? I once lifted an ingot of gold in the Bank of England Museum’s exhibit and it felt like the 12kg that it was.
Thanks. I particularly appreciate the link to the way major countries established – and exploited – colonies.
It’s important and in this context almost never said
I don’t think it was the case that you had to have gold to the value of the currency in circulation, though in the early years it was basically coins and there was little in the way of bank deposits or bank notes. What you needed was confidence and enough gold to satisfy any requests. Whenever there was any real trouble the first thing that happened was the gold standard was suspended, as in July 1914. It did provide a mechanism for commercial banks to withdraw their Central Bank Reserve Account balances, which they do not have now.
After 1492 there was a century of economic prosperity in Europe, which was caused by the flood of gold and silver from the Americas, so a pretty steady increase in the money supply of maybe 4% a year. The ‘Long Boom’ after 1886 which ended in 1814 was directly down to the discovery of the Reef in Johannesburg – the richest gold mines ever discovered. That also led to an annual increase in money supply of maybe 3% a year. By contrast the Depression of the 1870s was a time when the California / Australia gold rushes were over and nothing new was discovered.
Paradoxically the much claimed benefit of the gold standard supposedly creating prosperity by limiting the supply of money, is the exact reverse. The periods of prosperity gold bugs hold up as their examples are exactly when the gold standard was causing a sustained increase in money by mining.
In the 1920s the boom in the USA was largely down to much of the European gold stock having migrated to the US to pay for WWI. This over stimulated the US. Meanwhile the lack of gold in Europe caused chronic deflation and recession (to which the 1923 German inflation was the exception). In the UK price levels and wages were halved between 1918 and 1928 as the government sought to return to the pre-1914 parity of $4.86 per pound. That caused the General Strike of 1926. Meanwhile it was deflation in Germany from 1929 to 1933, with associated mass unemployment, that brought the Nazis to power.
The lesson would be that if you want to put random events in charge of the economy, then something like the gold standard is a good way to do it.
You should probably mention the official price of gold. That continued into the late 1970s, but provided a Bretton Woods mechanism for the US to devalue the dollar which they did several times towards the end. I can remember it going from $42 to $48, and I think there were a few more steps. All greatly celebrated in South Africa since gold was the biggest export in those days.
Noted
Thanks
Thanks Tim – you have much more knowledgably and eloquently expanded on what I was trying to say above.
I always think context and framing are important, particularly with a historical topic like this, but that won’t help Richard to keep a tight focus on the purpose of his glossary!
That is the conflict
I will have to do fractional reserve banking now
Whether we need the history as part of the glossary is moot…. I think it fascinating but others might think it too long.
However, the point that “tying the quantity of currency in issue to the amount of gold we can dig out the ground is absurd” is an important one. A modern economy needs the “right” amount of money to achieve economic goals.
This step matters. Once you see that an arbitrary limit on the amount of money in circulation (ie. a gold standard. (even bitcoin?)) is a bad idea then you are half way to “getting” MMT…. which at its heart says that the amount of money in circulation is an “output” of trying to meet other economic goals rather than a constraint.
This is how I am redrafting it….
Key stroke error -long boom ended in 1914 not 1818
I really like —if you want to put random events in charge of the economy, then something like the gold standard is a good way to do it.
”When jurisdictions developed their own currencies as an indication of their own sovereignty the need for a method of comparing value between different currencies was required to facilitate international trade.”
This seems to me neatly to sum the reason for a commodity “standard” for money (gold, but at different times in history and place, silver and so on). There is a beautiful example of the problem the gold standard creates in a crisis, which Mehrling illustrates with valuable brevity from British history, when it was the world’s leading reserve currency in the 1840s: and then used reserves held centrally (notes and deposits), to ensure elasticity of lending: which worked well for a crisis in domestic ‘bills of exhange’, but unravelled for a crisis in international ‘bills of exchange’, which the holders could demand were paid in gold (see ‘The New Lombard Street’, 2011; pp.20-23). The elegance of the example is that Mehrling goes on in the next section, pp.23-25 to move the argument on money market instruments from the 1840s and international ‘bills of exchange’, to the modern Repo market.
I would merely add to that, the thought, if I recollect correctly, that in the 20th century, under the gold standard, the first thing that typically happened in a crisis in Britain, if there was a run on gold; was instantly to suspend the gold standard’s operation.
Thanks
A brief point on the untidy nature of the history, that perhaps helps an understanding why high value commodities may be thought to provide a reliable solution to an insoluble problem. I have compressed the history.
Historically, high value, rare commodities were the only common measure for valuing different sovereign currencies. Domestically, however tax and the law (the law of treason applied in Britain to those who meddled with the currency, which underscores how singularly important the currency was to the sovereign – a matter of life and death), may have been sufficient to ensure acceptance of the sovereign money, but sovereigns did not help public confidence in money; even in a gold coin. The problems that arose included the tendency of sovereigns to use seigneurage in different forms to extract advantage, to profit from the right to mint money (for example reducing the gold or silver content of the coinage – Elizabeth I exploited this in Ireland, and it led to a major court case, when challenged, but the Crown had the advantage of the Privy Council deciding the case); or failing to mint sufficient small value coins for wide usage (in the 14th or 15th century small value Scots coins and other substitutes circulated freely in England because there were not sufficient ‘farthings’ or other small coins minted for the economic activity already present). Charles II of course, sensationaly ‘stopped the exchequer’; he stopped payment of interest on bonds held by the London goldsmiths, causing a crisis and wiping out a number of goldsmiths.
On the ‘other side of the coin’ the commodity coinage was constantly under siege from an understanadably suspicious public, but which included those who ‘clipped’ the coins (in spite of the treason law), to extract some of the gold or silver content, undermining the intrinsic commodity value of the coin. There was a badly executed recoinage in 1696 (but continuing bimetallism – gold and silver, and hence potentially ‘de facto’ two commodity values), because so many coins in circulation were forged or clipped, in which John Locke was heavily involved. The failure eventually ended with bimetallism being replaced by the gold standard long afterwards. The domestic economy was, however not insulated from foreign trade to the extent that the public wanted, or relied on foreign goods and services; from countries with sovereigns no less subject to bad monetary practices than ourselves.
The problems created both by the commodity in use, and the scheming of sovereigns was not likely, easily to induce high levels of trust in public, minted money.
One of the few pages on my own site, from a slightly different perspective, is the one on “Money: Gold standard to labour standard” at https://www.mmt.works/money-from-gold-standard-to-labour-standard/
Some readers may find some of the sources interesting, giving a history of the gold standard. You’re welcome to use anything of interest.
I’ve also had a look at the Government Cabinet minutes at the National Archives, and was surprised to find not a mention about the USA (and hence the UK) abandoning the gold standard in 1971. Maybe the Treasury discussed it, but I haven’t found anything. It would be interesting whether the government realised the implications. Perhaps based on what the government and other politicians tell us today, they still haven’t realised the implications of having a fiat currency.
I think your last sentence is correct
That will be dealt with in the myths section….
Hi Richard
Worth remember in the The Spider’s Web: Britain’s Second Empire, that the Gold Standard was undermined by the “Eurodollar” 4m 33s and 6m.53s
https://www.bing.com/videos/search?q=second+empire+nicholas+shaxson+youtube&docid=607988780699576136&mid=57EA43C6EB53FEEB6B7957EA43C6EB53FEEB6B79&view=detail&FORM=VIRE
Bryan R,
Curious about the Eurodollar market I found an informative article here….
https://www.thelykeion.com/primer-the-eurodollar-market/?fbclid=IwAR2-gtaBDJLrWmEPAklPEOSRjoFEgVtj0DDz8kPyB_v-bJecs8-hnLR_kms
(Subsciption is free for full article)
Apparently this was a new and non national currency invented (like most money) out of thin air. But better still for the banks who traded it, there was no national or indeed any overall regulator. The US banks eventually realised they were holding more dollars than the Fed had created because of this slight of hand. Very benficial to the banks . Milton Freidman investigated the currency too.
“Milton Friedman essentially said ….“their major source is a bookkeeper’s pen.”
The article goes on……
“Back then, the gold standard was still in effect (not lifted until 1971), and so there was an understanding that under a gold standard, you can’t inflate the value of dollars away by printing because they had to be backed by gold. This held true, but only in domestic terms, which was where the US had control over the USDs.
With the emergence of the EDM, understanding the money supply from a global perspective became impossible as the USD to Gold ratio became completely distorted (as large volumes of USDs were being printed outside of the US without The Fed’s approval). Implied here is that even before the de-pegging from gold and today’s QE-infinity, there were new USDs being created, and destroyed, basically out of thin air, in the offshore market.”
But the Fed cannot put this genie back in the bottle without creating financial chaos is my guess.
The eurodollar market was a major reason for the demise of the gold standard – without a doubt
What occurs to me reading all of this fascinating stuff above is that the Gold Standard was about (perhaps) tying the value of money to something ‘tangible’.
What we know is that money is a more elusive a concept, and is not as tangible as a concept as gold is especially given how it gets moved around digitally today.
But what is more ‘tangible’ is for money to be backed by something that can pay – has authority to issue money to settle debt or transactions.
That entity to me at least is the central bank of a country whose government issues a sovereign currency. The motives of the Gold Standard are questionable and it seems to me an artificial way of doing things. It is also a denial of sovereign power.
Since you are asking for comments, here is mine.
I think it would be good to either focus on a definition of the system or go deeper into the actual history. As it stands, parts comes across a bit as a just-so-story.
For example, one paragraph starts with “To achieve this outcome, it was then decided”, and I immediately want to know where and when that decision happened. Was there a European conference on the standardisation of coins? If there wasn’t, and it was more of a convergence of interests, or one power (likely Britain) forced the others, then it wasn’t decided as such.
If you want to go deeper into the establishment of the gold standard (which happened in the 19th century and mostly from silver or bimetallic) and colonialism, I would recommend Late Victorian Holocausts as a starting point. It includes how the transition from bimetallism to gold standard in the west created a surplus of silver coins that was used to undermine the economies and states in Asia, most notably China and Japan. The books sources may yield more background to the actual historical establishment of the gold standard and the forces that created it. Unfortunately, l have lent out my copy, so I can’t give a more precise account.
You hit on the conundrum I fae with this glossary.
It is not meant to be Wikipedia.
Nor is it meant to be anything but my personal view.
And it is meant to assist the lay reader to understand issues they have come across, largely on my blog, meaning a broadly similar style is required.
What is the balance between brevity, history, definition and contextual interpretation? That is what I am trying to work out. But brevity is important. Not least because there are going to be many hundreds of entries.
If Bradburies are to feature, then perhaps Worgl and demurrage should get a mention too. It would be nice to see a brief section on how layer upon layer of bank interest (this being levied on money they never had) is woven into retail prices as pointed out in depth by the late Margrit Kennedy. In principle, given their content can change, you must be wary of linking to external sources, however, Kennedy having sadly left us some years ago now that’s unlikely to arise as a problem with her published material.
I suspect that will go beyond the limits, for now
I see no especial reason why this need stop growing though
Not sure whether or not your glossary entry is the right place to include this, but isn’t part of the great many misunderstandings of “the gold standard” the notion (in part cemented by that very title) that there was one universal such rather than a great many over time and place, including of course all of its suspensions during crises? All of which call into question what I take to be the popular impression that it represents some immutable, natural “standard” at all but simply rather just another series of contingent arrangements deemed convenient at the time by those with the authority to make them and the power to impose and maintain them — for a little while, anyway.
I’m afraid that I’m not making myself terribly clear, but it can’t be much of a “standard” if various and sundry sovereigns can always and everywhere be making up its rules, can it? Perhaps there’s a lesson somewhere in there regarding its abandonment …
My redrafting will try to take this into account
Thanks
Apologies, but your proposed text doesn’t seem to fit the definition of a glossary item. Glossaries are lists of definitions. The gold standard has a simple definition which can be stated in a sentence or two, as has been done on investopedia, wikipedia, brittanica, and other sites. I believe discussions belong elsewhere in any document, glossaries are only so everyone knows what is meant by the words/terms listed in it.
Politely, it’s my glossary, and my rules
If those entries met my needs I would not need to do what I am doing
Hi Karen
This is a heterodox blog.
The sort of glossary you describe is an orthodox one – it merely states the conventional wisdom.
This blog has always questioned that wisdom and its glossary looks like it will be consistent with that.
If you read any books about economics by Ha Noon Jang for example – he does the same , he probes deeper and reveals a lot about the assumptions behind the notions we live in under.
I highly recommend both this blog and Jang to you (as well as others such as Steve Keen).
Thanks
Excuse me for the correction, PSR, but “Karen” (or others) would need to look for Ha-Joon Chang. https://www.hajoonchang.net/
It seems Wikipedia has not yet noticed his move to SOAS last year, after more than three decades at Cambridge.
He has finally been given the status he deserves by a university
I think he was a Reader at Cambridge – what most universities would call a Professor. Cambridge recently decided to move away from its peculiar nomenclature to avoid the confusion with titles that many other academic bodies use – only one “reader” left at https://www.econ.cam.ac.uk/people/academic-staff for example, and many “assistant” or “associate” professors now rather than “lecturers” and “senior lecturers”.
I think he is now a “distinguished research professor” at SOAS, which I guess is equivalent to a “personal chair”. Good for him.
Agreed
But that he was not a prof at Cambridge was a scandal