Everything Everywhere Daily: History, Science, Geography & More - The Gold Standard

Starting point is 00:00:00 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 very first time under a single global currency. Economists have been debating about the merits of that system ever since. Learn more about the gold standard, how it started and how it ended on this episode of Everything Everywhere Daily. What if your perceptions about the past were wrong? throughline is a podcast that takes you back in time to uncover the parts of the story that may have gone unnoticed. It effectively turned day into night and how it shaped the world now. Time travel with us every week on the ThruLine podcast from NPR.

Starting point is 00:01:02 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? And the answer to that is no. Almost everywhere you could find gold as a medium of exchange, you also found silver and other metals as well. This ancient system was known as de facto by metalism. In ancient Rome, for example, they had gold coins known as the orius.

Starting point is 00:01:41 However, it wasn't used for common transactions. The Roman cisterci and denarius were silver coins which were used for everyday purchases. The fact is there just isn't that much gold in the world as there is silver. The ratio of gold to silver 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 when in history you're looking. I checked just before writing this episode and the value of gold is currently about 80 times that of silver. Gold really couldn't be used as the sole species. for money in a world where the value was in the metal in the coin itself. To purchase something

Starting point is 00:02:16 small and mundane like a loaf of bread would require a gold coin so small that it would be very difficult to mint and very easy to lose. The gold standard is defined as the system where only one metal, 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's who made this mistake was none other than Isaac Newton. Yep, that Isaac Newton. The guy who figured out how gravity worked, the laws of motion,

Starting point is 00:02:50 light, the inventor of calculus, and the guy who solved the brachystachy crone 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 the imports to England were paid for with silver, and all the exports ended up being paid with gold. Here I need to explain something you might have learned in your Economics 101 course, known as

Starting point is 00:03:20 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've 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

Starting point is 00:03:46 want to get rid of that, too. In the case of 18th century 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 to silver exchange rate made it such that gold was really the only game in town.

Starting point is 00:04:11 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 it 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.

Starting point is 00:04:53 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 only to 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 bi-metalism 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 the events that changed the monetary

Starting point is 00:05:38 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 of the new gold flooding in 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

Starting point is 00:06:27 de facto gold standard. This created an enormous trading block of countries that were now 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 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.

Starting point is 00:06:58 In 1873, the German Empire moved from the silver thaller to the gold golden. The Latin monetary union, which included Spain and Italy, in 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 the owners of silver bullion from converting it into silver coinage, but still allowed gold bullion to be converted into 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.

Starting point is 00:07:42 Scandinavia, the Netherlands, the Austro-Hungarian Empire, and Russia all converted to gold in the following years as well. One problem that soon developed was in countries which still had outstanding silver coins. The gold standard decreased the 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 load in Nevada. The silver coins floating around now had silver that was worth less, but could be converted to gold at its face value. This was solved by replacing the silver coins with bank notes 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

Starting point is 00:08:26 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 of the 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 their gold reserves taken away in reparation after the Treaty of Versailles. This was an indirect cause of hyperinflation seen during the Weimar Republic just a few years later. The next big blow to the gold standard was the Great Depression. There's been a great deal of debate amongst economists as to the role the gold standard played during the Great Depression.

Starting point is 00:09:08 Many think that the gold standard made central banks unable to expand the money supply to deal with the crisis. One result is that 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 their gold to the U.S. 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 as well in 1934.

Starting point is 00:09:57 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 that it was the core cause of the Great Depression, and there are others who think that the bank failures of the 1930s were sparked by Britain dropping the gold standard causing a credit bust.

Starting point is 00:10:30 There are some who think we should return to the gold standard and some who think we absolutely should not. Gold, however, 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 Breton Woods, New Hampshire. There they hammered out in person, a new international market. monetary regime which would govern the post-war period. It wasn't quite a gold standard, but gold did have a big part to play. The Bretton Wood system will be the 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 Thompson and Peter Bennett. Today's review comes

Starting point is 00:11:17 from listener Doug Topin over at Twitter. He writes, if you like succinct and informative podcast on a variety of subjects, then the Everything Everywhere Daily podcast by Gary Arndt is excellent. Every episode is interesting and sized just right for listening. I definitely recommend it. Thanks, Doug. I always appreciate people sharing the show on Twitter. It helps it reach a much wider audience. Remember, if you leave a review over at Podchaser until the end of April, they will make a donation to help feed Ukrainian refugees, which will be matched by several other podcast companies.

Everything Everywhere Daily: History, Science, Geography & More - The Gold Standard

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