In Our Time - The Gold Standard

Episode Date: January 20, 2022

Melvyn Bragg and guests discuss the system that flourished from 1870 when gold became dominant and more widely available, following gold rushes in California and Australia. Banknotes could be exchanged for gold at central banks, the coins in circulation could be gold (as with the sovereign in the image above, initially worth £1), gold could be freely imported and exported, and many national currencies around the world were tied to gold and so to each other. The idea began in Britain, where sterling was seen as good as gold, and when other countries rushed to the Gold Standard the confidence in their currencies grew, and world trade took off and, for a century, gold was seen as a vital component of the world economy, supporting stability and confidence. The system came with constraints on government ability to respond to economic crises, though, and has been blamed for deepening and prolonging the Great Depression of the 1930s. WithCatherine Schenk Professor of Economic and Social History at the University of OxfordHelen Paul Lecturer in Economics and Economic History at the University of SouthamptonAndMatthias Morys Senior Lecturer in Economic History at the University of YorkProduced by Eliane Glaser and Simon Tillotson

BBC Sounds, music, radio, podcasts. Thanks for downloading this episode of In Our Time. There's a reading list to go with it on our website, and you can get news about our programs if you follow us on Twitter at BBC In Our Time. I hope you enjoy the programmes. Hello, the century between 1870 and 1970 was the age of the gold standard, where currencies around the world were in some way tied to the price of gold. Britain had a gold standard long before with sovereigns you could use,

either to buy a pounds worth of goods or melt down into a pounds worth of gold. It was sound money. When other countries rushed to the same system and confidence in their currency grew, world trade took off. And when World War's set trade back, it was believed that a gold standard was essential to rescue it. With me to discuss the gold standard are Catherine Schenck, Professor of Economic and Social History at the University of Oxford.

Matthias Morris, Senior Lecturer in Economic History at the University of York, and Helen Paul, a lecturer in economics and economic history at the University of Southampton. Helen, Helen, Paul, when did gold become valuable in trade in Europe? Well, gold had been viewed as valuable since time immemorial, really, because people found that they could melt it down, it doesn't tarnish. It's not something you can easily, you can't create gold, you can't have a fake gold, as it were.

So anything that was valuable that could be used as a store of value, that could be used as a medium of exchange, would be helpful in trade. However, there are other things as well that could also be used, like, say, silver. And the gold was merely one of a number of different metals that you could make into, say, coins. And coins, therefore, could circulate as a form of money, but you could also store them. And as you've said, you can melt them down as well if you wanted to put them back into the base metal, into the metal that they came from. But really, it's about other people thinking that it's valuable. That's the cue to understanding that this is an important store of your

wealth if you can actually then sell it on to someone else in some form in the future. Was there a sort of almost amateur way of going about it, as much to do with barter as with gold itself? Well, not entirely. There were various forms of money, quite sophisticated monies, as it were, like book money. So you didn't necessarily have people doing international trading by shipping great wadges of gold metal in ships. But of course, it did facilitate trade if you didn't know the other person. The idea is you can have anonymous trade

and you don't need barter, which is requiring you to have something the other person wants. Money makes things slightly easier if you have something that you know they're going to want and gold coins can be that thing. However, they're not perfect because with all commodity monies, there are issues about things like the coins becoming worn, people hoarding the good coins and only trading with the bad ones.

That's called Gresham's Law. So the bad money drives out the good. We shouldn't think of it in terms of there being just one type of money. There are various things that are used to facilitate exchange. But there isn't this very formal gold standard system until economies become. are much more developed later on. Was Britain doing something with gold and its currency before other nations? A lot of Britain's trading was actually originally with things like silver coins.

But eventually, silver becomes very interesting to the Chinese economy. The Chinese economy is the biggest in the world. And the Chinese don't really want European manufacturers. So a lot of silver is coming from Spanish America, South America, through Europe and then out to China. And within the British context, or really the English context, there's this concern growing up that there isn't really enough silver staying around to be useful. And Isaac Newton, who's the master of the mint, he decides to do something about this. Essentially, he sets a certain exchange between gold and silver. And it becomes clear to a lot of people that they get more for their money if they buy foreign imports using silver and they keep gold to deal with their domestic transactions.

The mechanism wasn't developed to be like that, but it just by de facto becomes that gold is, therefore, the coinage to use within the English, later British system. So a gold standard, that means that you tie. the value of your currency to gold. Now, that is obviously the case when you actually have gold coins in circulation, but that was not the large amount of coins, really. The key thing here is especially once you have banknotes, that you make any banknote convertible into gold. So you tie your currency to gold. You can always exchange it into gold. That's a domestic thing. think. But if several countries connect their currencies to gold, they have fixed exchange rates to each other through gold. And that is the international implication of the gold standard. I actually

very much agree, Melvin, with what you said, we used to have only barter trade. I think when you have a gold standard, that is essentially barter trade, because you change something else against gold. And what this really shows is the distrust between parties and the only way to overcome that was essentially to do a barter trade. And that barter trade really in that sense, it lasted until the early 1970s. And I think we see this very much in the European languages. So take the French, They use argent for money and for silver. The Germans, their words for gold and money are almost interchangeable. So there is a very strong sense that real money is only money underpinned by a precious commodity.

What difference did the gold rushes of the 19th century, particularly in America and Australia, make? And why? The gold rushes of the mid-19th century were really crucial in transforming the gold standard and in making the gold standard a universal system. So until 1854 there really was only one country on gold, and that was England. Now, if one country runs the system, you don't need an awful lot of gold to actually run it, to have enough gold in circulation. But once you start expanding that to European countries and then to countries worldwide,

you really need a lot of gold. And that is the function of the California gold rush in 1848 and of Australia a few years later. So basically, the world monetary system quite literally soaks in a lot of gold and transforms over the next two decades. So basically what happens is that these new world gold discovery sites, they send their gold to the two main mince of Europe, to London and to Paris. These two countries transform them into gold coin.

And the French system here plays a particularly important role. In the French case, you could mint both silver and gold. So you had a so-called biometallic system. And in the 1850s, 1860s, the French mint chews out an enormous amount of gold coin. And for the first time ever, in the late 1850s, early 1860s, people start contemplating the move to a global gold standard because they realize there is simply enough gold. We could think of doing that. What were the hurdles to international trade when it came to finance? What is the gold standard going to solve or overcome?

I think we should try to see the emergence of the gold standard as an evolution of the international monetary system. Before 1850, we really lack the gold. At least we lack the gold if we wanted to transit to gold for many countries. And then we have these 1850s and 60s, which are really a transitional picture. period in which for two decades we have in operation three systems. We have a gold standard in England. We have a bimetallic system in France and some other countries like Italy and Switzerland and Belgium. And the rest of the world is basically on silver. And then this three-way system,

which worked halfway okay in the 1850s and 60s, gives way to a gold standard. From my point of you, it really is an evolution, it is more a gradual change. Thank you. Catherine, Catherine, Cheneck, why did so many countries tie their currencies to silver rather than gold before the 1770s? Well, as you've just heard from Matthias, there was the important gold discoveries around the world, both in California, but also in the west coast of Canada and Australia. And this altered the supply of gold relative to the supply of silver. And in fact, the price of gold in terms of silver fell. So in those years in sort of the 1850s, 1860s, the price of silver is actually rising. The price of gold is falling. Fundamentally, why countries would choose silver, in order to

move to a gold standard, you have to have enough gold reserves in order to make that link to your ability to defend a fixed price of your currency in terms of gold. And in order to do that, you need to have gold reserves. So some countries that don't have large gold reserves remain on the silver standard, indeed some all the way through into the 20th century, like China and Japan. Some poorer countries tend to stay on silver, indeed, after the 1870s. But until the sort of late 1860s, it's not clear that there's going to be a move to the gold standard, and there's still quite a lot of room for maneuver in the bi-metallic or silver standard. Was there a feeling at the time, Catherine, that they had to get this solved, they had to get

one currency for all the big traders of the world, to make the thing work better so that your pricing between thousands of miles was determined with the snapover vinger because it was the gold standard. The importance of having a stable price for your currency and sort of a predictable value for your currency over time was really important for trade, I think, and that's the benefit of having a pegged exchange rate to something, to some kind of metal or some kind of agreed value,

and a credible peg that merchants believe in it. So that gives them confidence to trade over long distance over a long time. The issues with having multiple metals, for example, by metalism, where you define your currency in terms of the value of silver and gold simultaneously, have to do with the changes in the market price of gold versus silver. And this speaks to a really kind of fundamental foundation for the issues around the gold standard or any metallic standard. and that is that there's a market price for this commodity, gold or silver, and then there's an official price that the central bank or the government is setting.

And so it's really important that the government or the central bank can maintain the official price at the same price as the market price. So when there's changes in the market price, for example, if the market price or the official price is cheaper than the market price, then you'll go to the central bank and buy some cheap gold, buy some cheap silver, and then make a profit by selling it on the private market. And so gold will flow out of the central bank or out of the treasury coffers. So it's this kind of tension between market price and official price that's really tricky. And it becomes especially tricky when you've got two metals that are changing in relation to each other.

So it's how long you can kind of sustain this tension depends on how much metallic reserves the government or the central bank has at its disposal. Thank you, Helen. And Paul, why did so many countries adopt the gold standard in the 1870s? And what part did the city of London play in all this? I think there comes a point where really the big player, the big economic player, is Britain. And you start to see countries. Why is that? Well, simply because of the Industrial Revolution and then the Empire.

So you have this, what we're talking about is lumps of metal. We're not really connecting them to what's going on in the economy itself. you're starting to see, really, with all the reasons behind British economic growth and power, that the gold standard just happens to be the one that Britain is on and that gold is held in London, in large amounts. It's still, that's the case today, in the Bank of England, particularly. And what a lot of countries do is they choose the gold standard because it wants to be, be a signal that they are a developed country, that they are copying the British lead, and that it's

almost like an exclusive club. But again, as Catherine was saying, the Asian countries aren't in that kind of orbit. They're not so interested in joining the gold standard. But other countries start to think that they can show that they're not simply basket case economies, that their governments can be held to the discipline of the gold standard. And what that means is if you're going to connect your currency to your gold reserves, it limits your ability to just print lots of money. And that's what this is about. It's showing that you have a disciplined economic policy.

So every time you pass over a note, that note says you can go to the bank in England and get it as a sovereign or ten sovereigns or whatever. You used to be able to do that. You could go and replace your piece of paper with gold. And that's part of an evolution of getting people to trust paper money, which we now take for granted as being perhaps more trustworthy than electronic money or debit cards. We can all think of how money has evolved throughout our lifetimes and how particular people struggle with that.

That transfer of paper money to gold really helped bring about this move for the ordinary public to accept banknotes. What advantages appear to flow from this acceptance of the gold standard by so many rich countries? So Helen already touched on the main domestic advantage. So the gold standard stood for sound money. It came to stand for limited government because the government couldn't print money. It needed to cooperate with parliament, had the say on the budget and so on, so sort of it stands for constrained government.

But the main element, or at least the main element which we remember today from the gold standard, are the international advantages which it conferred. And the main advantages here, they are related to the fixed exchange rate stability, which the gold standard brought with it. And more than that, they not only stem from gold in itself, but they basically stem from the other countries which are on the system. Starting in 1873, not only Britain, but also France and Germany were on the gold standard. So suddenly the three big European economic players were all on gold.

And now look at a typical trade account of any European country and sum up the trade chair that such a country will have combined with Britain, France and Germany, it will typically account for 50 to 80% of their trade. So trade benefited, but likewise think of capital imports. Poorer countries wanted to import capital from the richer countries and they happen to be on the gold standard. So we see a kind of a virtuous circle emerging in which one One thing brings the next. And the gold standard really comes to stand for that. It sort of epitomizes the system.

It is a crucial link in this virtuous circle. So the gold standard helps trade and trade helps the gold standard. Yes, absolutely. That is also why we like looking back so much, especially on that gold standard between 1873 and World War I, because we connect it with a period in which, A lot of economically beneficial forces reinforced each other. Catherine, Catherine, Catherine, Scheng, how would the gold standard work in practice? Melvin, now you've asked a really tricky question.

The debate is still going on, but I'll give you a few options. First of all, just to define what is kind of meant by the gold standard. You have to be fixing your national currency in terms of a particular weight of gold. So you're fixing the value of your currency at an official price. of gold. You have to allow gold to flow in and out of your country freely. And in some way, you can think that your money supply should be proportional to your gold reserves. So if you keep those three elements in your mind. So one of the early ways that people thought the gold standard worked is that if your country was spending more than it was earning, buying more than it was

selling internationally, then that kind of would be sort of an outflow of your money, an outflow of gold, then your money supply would be contracting because your gold is flowing out of your country. So your prices would be constrained and interest rates would go up and this would make your exports more competitive and it would draw capital into your country. And so it kind of balance you out again. So there was sort of an automatic mechanism, people thought. In fact, however, there's not a lot of huge flows of gold and all this kind of adjustment would take time, which we don't actually see happening during the heyday of the gold standard in the 1870s. 1880s. So people started to think, well, maybe the whole system's kind of managed by central

bankers. And when they sensed that there was going to be an outflow of gold, they increased their interest rates in a kind of precautionary way. And then the gold didn't actually flow, but the adjustment still happened. And this was called sort of that central bankers were somehow following rules of the game, particularly at the Bank of England and the Bank to France. And we do see that there is cooperation among central banks during the gold standard and the bearings crisis, for example, the Bank of England borrowed gold from the Bon to France to help it out during that financial crisis. A third kind of aspect, which I find a little bit more convincing, is that the role of gold is partly nominal rather than practical. And in practical terms, international trade was really financed through the city of London and settled in sterling in pound sterling. in the British currency. And there was so much credibility, so much faith in the convertibility at the

fixed gold value for the pound sterling because of the strength of the British economy and because of the strength of the city of London, that sterling was as good as gold in this system. And so that allows kind of greater liquidity. It allows kind of the financing of trade and it allows that kind of settlement to happen a little bit more easily. And maybe that's why we don't see the huge flows of gold. And the last point I'd like to make is related to what Matthias said, this is the time of the first globalization. This is a time of unprecedented movement of people, of goods, and of capital around the world. And these trends are all mutually reinforcing and maybe underpinned by the gold standard. But maybe the gold standard functioned as well as it did, partly because of these huge flows of real factors,

of people moving to Canada or the United States to grow wheat. which comes back out into international trade. In order to do that, they need investment in their railways and their infrastructure, which generates flows of capital. And these things together increase real wealth. Thank you, Helen. Helen, Paul, when the world's currencies, as has been described, are developing and more are coming into this, let's call it a club, a link to the price of gold.

What constraints did that put on governments? Well, here we come into the realm of what's called the Trilemma or the Impossible Trinity. Let's suppose you have three levers. One is a fixed exchange rate. That's the gold standard. One is free capital movement. So capital can come in and out of your country. And the other one is an independent macroeconomic policy.

You have two hands. You can choose to hold on to two of these levers, but not the third one. And you can have various combinations thereof. if you've decided to stay on the gold standard, then you're giving up your independent macroeconomic policy if you're also going to allow capital to flow in and out of your country. So let's suppose that you decided you wanted a low interest rate, you're going to help your mortgage holders or your small businesses.

People who are international investors, they think, well, we can get more for our money elsewhere. We're going to sell your currency to buy foreign currency, and get a better return. That would ordinarily put a downward pressure on the value of your currency. But if you've committed yourself to this exchange rate, you've got to,

and you can't stop people, you've put no capital controls on. You only then have to put your interest rates back up again, really to encourage people to come back, or you have to start selling foreign currency. You basically are trapped into a situation where, and this is part of the reason why gold standard proponents like it, you're tying the government's hands about a lot of what it can do,

which if you don't trust governments, it's fine, but you're being put into a situation where sometimes your domestic economy has been sacrificed in order to maintain your place in this system. And as opponents, one opponent said, you're crucifying the mankind on a cross of gold. Nice, what happened to the gold standard? during the First World War, just about 40 years into the gold standard's life.

World War I interrupted the whole financial architecture, which had grown organically since the 1870s, if not earlier. So countries were in need of money. They were in need of gold. So the first thing all belligerent countries did is they stopped gold convertibility. So one of the ironies of the gold standard really is that in the one situation where people would want to use that reassurance that money equals gold, the government's essential banks say, no, we can no longer uphold this promise. So they stopped gold convertibility in 1914. They all need money and they all print money in very, very large amounts. amounts. And I think one of the reasons why we remember the gold standard so fondly is because we kind of, we also remember what happened when the gold standard gave way to something else.

So all these constraints on governments suddenly fell. They printed money in very large amounts, inflation levels during World War I, but also in the four, six or even ten years after World War I. 1 were very, very high. So what we see after the end of the so-called classical gold standard, after the 1870 to 1914 period, is the exact opposite of stability. And that in our recollection reinforces the idea of stability which we associate with the gold standard before World War I. Catherine, why were governments between the wars so keen to revive the gold standards?

I just add maybe to what Matthias just said, don't forget there's an outbreak of war. So trade between countries ceases there's a complete economic dislocation, particularly between Germany and the rest of Europe. So this is sort of a suspension. After the war ends, and it is a horrific war, it was unanticipatedly terrible in terms of loss of life and human misery, as well as the political dislocation of particularly central and western Europe. So after the end of the war, they're trying to kind of. piece the world back together again. And one of the things they think about is being normal is having a gold standard. So despite what I've said about how we, we as historians now debate

about how the gold standard actually worked or whether it did have kind of depressive effects rather than being stabilizing in the interwar period, there's not a lot of experience with floating exchange rates. Having a gold standard is the norm. And indeed, so getting back to normal was a really important impetus for governments. But did that in a sense intensify in what became the Great Depression in the 30s, late 20s 30s? Well, indeed.

So it's kind of a weird going back to a pegged rate. They do have an international conference in Genoa in 1922 to try to arrange an orderly return to a gold standard. But in the end, a lot of the exchange rates that are picked are quite ad hoc. Some of them are too high. some of them are too low. The pound, for example, goes back to the gold standard at the pre-war parity, which was equivalent to $4.86 in 1925. And of course, the whole balance of economic power

between Britain and the United States has shifted dramatically over the course of the war. So this means that the pound is really overvalued by about 10%, we think, from the mid-1920s onward. France, on the other hand, goes in at a much lower rate, so it has a lot of inflationary pressure immediately. So the system's not very well designed. It's on a gold exchange standard because there isn't enough gold to go around to actually have a pure gold standard. So Sterling is again playing this important role, but the British economy is no longer the anchor of the world economy that it once was. Helen, Paul, was there much debate about this about the gold standard? Was there much awareness in the wider public? Well, as Catherine was saying, the pound was overvalued.

And what that does is it makes exports very expensive for other people to buy British exports. So what the public actually saw was an endless insistence that something had to be done to make exports more competitive by dealing with the cost of production. And that meant largely targeting wages. And again, as Catherine was saying, there was all this human misery. And now you're being told, you now have to work longer hours for less money. and that has a knock-on effect, of course, on your local corner shop or the pub or the little businesses that are dependent on workers' wages coming to them.

So what you see is the public actually debating that aspect of the gold standard. They weren't necessarily given the economic theory. People like John Maynard Keynes debated the issues about the gold standard, but I think for the general public, what was happening is you're getting trade, union officials, you're getting the Labour Party and people like that, discussing the fact that it's just not fair or ethical to keep forcing down wages. And that then is the focus of debate. But as you've probably gathered, a lot of people really didn't understand

the mechanisms behind the gold standard. It's quite an opaque system. And you're just being told that it's important and necessary. Catherine. The gold standard really collapsed. between say 1931 and 1936 or so, and Britain leaves the gold standard in 1931. And it was considered that the gold standard itself,

that kind of rigid, fixed exchange rate regime, spread the Great Depression broader and made it deeper than it would otherwise have been, that when the United States increased interest rates in 1928, in order for countries to maintain their pegged exchange rates to gold and to the U.S. dollar, they all had to kind of tighten their money markets as well. And this again had kind of a recessionary impact on all these countries that were tightening their belts at a very difficult time.

So when the United States economy started to go down, it took all the other economies with it who were in the gold standard. So it kind of spread the recession more globally. What we do see in the 1920s is a conflict between a domestic discussion and a more sort of external international discussion. And as Catherine said, it has become sort of a mainstay in the economic history literature to be critical of policymakers in the 1920s. But perhaps let's look for a second at the language they use that shows very well how they perceived it. So they refer to the reestablishment of the gold standard as the resurrection of the gold standard. So they actually give it a name which is very Christian, you know, the resurrection of Christ. the resurrection of the gold standard, and this is how they viewed it.

They also start calling the pre-1914 gold standard, the classical gold standard. So it's something they want to emulate. And yes, of course, they were children of their time, but this explains what they did. So they did set up a system which was inherently deflationary, and that deflationary tendency then grew much bigger in the late 1920s, 1930s. And the only way to escape from that deflationary spiral, it actually turns out over a process of five years between 31 and 36, is to untie from the gold standard.

Is that why Richard Nixon put pay to the gold standard in 1971? Well, why don't we go back to 1945? And you'd think that after the Great Depression and all this things that Matthias and I have been saying about how it spread and made the Great Depression much worse than it might otherwise have been, that the whole idea of gold would be abandoned. Indeed, it was 1924 that Keynes called it the barbarous relic. But in fact, there's still some hankering for having that metallic anchor. So even as they're planning the post-war international monetary system, which is the whole thing is being designed to avoid another. Great Depression after this Second World War. They still have a role for gold in that there will be par values for every currency, but in fact, everybody will just be pegged to the U.S. dollar,

and the U.S. dollar primarily will then be pegged to gold. So it's sort of an indirect role for gold, but it's still not gone. I find that sort of in retrospect, I suppose, it's really hard to imagine how important having that metallic base somewhere at the foundation of the system was for the planners for Bretton Woods. And it's that system that operated through until, I don't know, maybe 1968, maybe 1971. And we've got to get off the gold standard in 1971. And that was Nick, on the whole you'd say, that was Nixon's doing. Indeed.

And can you just tell listeners how he did it and why did it? Well, during the 1960s, there's a lot, late 1960s, there's a lot of inflation in the United States. It's in balanced payments, deficits. It's in a pegged exchange rate regime, but it's now into deficits. Germany is in surplus. France is accumulating gold. The system is being pulled apart. When Nixon is elected in 1969, he's not as happy at international cooperation as his predecessors. And he immediately starts planning for leaving the gold standard and leaving gold behind. So how does you leave it?

In August 1971, after all this planning, he suddenly announced, we're suspending the convertibility of the US dollar to gold. We want all you countries out there to readjust your exchange. grants against the US dollar and will reset the whole international monetary system, which they did a few months later in December 1971. Helen Paul, what were the arguments for the return to the gold standard in some form when Nixon was making these decisions? What did that represent? Well, interestingly, Richard Nixon, as we know, bugged his own offices. And very recently, a couple of economic historians went in and listened to all of the tapes of him speaking to his advisors. Some of them were pro-gold standard for some of the reasons that Catherine and

Matthias have been mentioning all this issue about some sort of connection to gold, where gold has totemic value and everyone just to accept that is important. But you also get people who want off the gold standard because it's a barbarous relic. And what the two economic historians conclude is that Nixon really didn't follow a lot of the ins and outs of these discussions. But what he wanted was to get reelected and he wanted control over setting his own interest rates. That was what was going to help him get reelected. However, what appeals to people who like the gold standard, who are called gold bugs, is the notion that somehow gold is just obviously has a real value as opposed to paper currency,

which is somehow not real, or even worse, intangible, currencies, which are even less real, where the tangibility and the physical weight of the object is so very important. And as Matthias was saying, it's somewhat odd that the very thing that gold bugs like, the idea that gold is valuable in times of crisis, because you can rush across a border with it as a refugee, that's the very thing that actually at state level doesn't happen, that people go off the gold standard. And this is called the fallacy of composition. This conflation, between what's good for me as an individual or household and what's good for an entire country.

If it's bad for me to go into debt, therefore I don't want my government to have debts of any sort. If I can bury gold in my back garden, I want the state to do essentially the same thing by having a big vault and putting gold into that. It's a lot more complicated than that. There is a big difference between the gold bug individual and what's actually best for the state.

Catherine, what's largely replaced the gold standard when it comes to guaranteeing confidence in global trade? And how does it compare? Well, they tried to come up with sort of a paper gold that they could print on demand, which is the SDR, but that never kind of took off. What we talk about now is that we're not really interested in exchange rates anymore,

that we just allow those to fluctuate. The new orthodoxy from the 1990s onward was to target price stability and growth in your own domestic economy and that if everybody did that, exchange rates would kind of stabilize and we'd have a nice globalized system, which indeed we did. But it's kind of called a non-system. Some countries float, like the euro or the sterling or the US dollar, but others are managed, others are basket pegs.

You've got the euro, which was created in 1999, the ultimate fixed exchange rate amongst the European nations. So in a sense, there's not a replacement for gold. The whole kind of orthodoxy of how money works and how international monetary systems work, has moved beyond. Dias, how would you sum up the impact of the gold standard in those, well, let's call it 100 years, but even though it was replaced by another name, how would you sum it up?

Well, I think the gold standard has had a huge impact, partly because there is something in the gold standard for everyone. So I think I would like to distinguish at least three levels, an economic level, a political level, and perhaps even a psychological level. So on the economic level, the gold standard, especially that first period, 1817, 1914, stands for everything that economists like about a globalized economy.

It stands for cooperation between countries. It stands for increased trade, for capital exports. So it stands for positive things throughout. On a political level, the gold standard still stands for that idea of a restrained government. Because when you tie your monetary policy, things have to go through Parliament. Parliament, they determine the budget. Kings and later on governments have tried to wriggle out of that and you put a stop on that by means of the gold standard. That's why, for instance, the gold standard is so popular with libertarians in the United States.

And then you have a third level, and that perhaps in the popular myth of the gold standard is the strongest one. And that's the sort of the perennial quest for stability. And Catherine already said that our ideas, how we want to secure stability, have very much moved away from gold and even for, from stable exchange rates. But the idea that we want something stable is with us as much or even more so than it was in past periods. So whenever difficult times come upon us, be it the global financial crisis, be it COVID now, this idea resurfaces.

And then some people, not all people, but some people, like looking back to the gold standards, which they thought fulfilled that promise. You're all concerned with economics in your academic life. Did the gold standard and the idea of it changed the way you yourselves taught this discipline? I became really interested in economic history because of studying the Great Depression and the debates about what caused that Great Depression and why it was so deep and so prolonged. And the gold standard really plays an important role in that.

explanation. So certainly for me as an academic, I think it's a really, it's complicated, and I get that, but it's really important for people to understand the importance of exchange rates in their everyday life, and it's important to understand the gold standard to understand the waxing and wading of globalization. Matthias, did it change the view of economics taken by those who had theories of it? Yes, I think it has. I think the gold standard, for me, stands for the ambivalence and the differences of how contemporaries viewed things compared to us today. So when you look at the 1920s and for a long time in the 1930s, policymakers firmly believed they did the right thing in restoring and then upholding the gold standard.

And today we think the exact opposite. So I think studying the gold standard introduces a certain element of, it makes you humble. It makes you realize that we are all children of our time and later generations might well see our own actions in a very different light. And finally, Helen? I think it's one of those issues that seem somehow counterintuitive

to start off with when you're told culturally that gold is so very important and you see how your relatives value gold objects that they own to suddenly then realize that time. your whole economy to this lump of metal is not actually a good idea. And those insights, those aha moments are actually very powerful. Well, thank you very much. Thank you, Helen, Paul, and Catherine Schenk and Matthias Morris, and our studio engineer Jackie Marjoram.

Next week is the 20th century French novelist Colette, author of Gigi and The Claudine Stories. Thanks for listening. And the In Our Time podcast gets some extra time now with a few minutes of bonus material from Melvin and his guests. Would you like to pick up anything that you wish you'd said that you didn't have time to say in the programme? Oh, well, thank you. I think what's interesting to me is the coinage

that comes out of this notion around making commodity money. And certainly there's an entire history of Western African gold being stamped with not only the head of the monarch, but also a tiny elephant stamped on it, just to say this is West African gold. Sometimes an elephant and castle that appear on it. And also it's interesting when they reuse somebody else's coinage and over stamp it.

So you have silver Spanish coins with a big head of the Spanish king and a tiny head of King George III stamped onto it in the middle. That that kind of use of coins is something that is really fascinating. You also get Chinese symbols. stamped into Mexican coins because they were circulating in China. That's very interesting. So I think I see the redesign of the gold standard in Breton Woods, perhaps a little bit different from Catherine.

So I think what we see after World War II is an important theme of monetary history in the sense that really which country is actually able to issue a currency that other countries want to have. Now, the only country that emerges victorious from World War II on all levels, including the economic level, is the United States. So what we see after World War II really is that countries increasingly look to the United States, and then they realize we had this other problem of the interwar period, a lack of liquidity, and their way to square the circle in Bretton Woods in 1944 is essentially to say,

well, we still want stable exchange rates. We don't have enough liquidity. We have one economic powerhouse left in the world, the United States. So we let this one country run the gold standard. In the U.S., there still is a full-fledged gold standard until the Nixon shock. And all the rest of the world, or at least of the Western economies, connect their own currency to that one. currency. And in that sense, you can also interpret the Nixon shock in the following way. You can

say that then suddenly, given the fiscal expansion, the need to accommodate expansionary fiscal policy with inflation, undercuts the belief in the United States. Suddenly, you have a couple of European countries who are unhappy with monetary and fiscal spending in the United States, and they suddenly say no to Bretton Woods. So removing the last link also is a bit of a vote of misconfidence into the United States. Yeah, but I guess I take issue with your word of suddenly, Matthias. So you could say that the gold standard ended, or the gold element of the Bretton Wood system ended in March 1968. So or even in 1962, from 1962 onward, the G10 central banks all had to intervene in the market to support the $35.

an ounce, which was the gold valuation of the U.S. dollar under Britain Woods. And eventually the market overtook them in March 1968. And from then on, you've got a market rate for the U.S. dollar, which everybody can use, which is quite high, and indeed higher than the official rate, which stays at $35 an ounce, and only is used by central banks. So in a sense, that kind of gold link of the U.S. dollar is broken first in March 1968. I'd also take issue maybe with the suddenness of the Nixon shock. You know, sometimes a shock is not a surprise.

And the discussions, bilateral and multilateral discussions about ending the gold link or revaluing the US dollar or changing the international monetary system were discussed for years before August 1971. And in part, I think the Nixon announcement in August 1971 was also aimed at his domestic audience because he, was introducing wage and price controls in the same speech domestically. So he had to be seen to be hammering away at the, at foreigners who were supposedly engaged in unfair trade practices and had artificially low exchange rates. But even then gold wasn't gone. The Smithsonian agreement of December 1971, and we're recording just about 50 years later, it reset a gold value for the US dollar at $38 an ounce. But the dollar was not convertible at this price.

But they still had a par value. So in a sense, I wanted to kind of introduce an element of gradualism to this rather than abrupt turning points. Well, it's very, thank you very much. That is helpful. I tend to ignore gradualism sometimes. You're going to finally, Mattas, you're coming back. Yes.

And actually, I think I would agree with that, with that element. which Catherine calls gradualism. So I think when we look at this whole period from the gold findings in California and Australia to the present day, we see an international monetary system shifting in a very gradual evolutionary way. And I think this is what we would expect.

This is a very delicate edifice which does not withstand strong shock, so everything needs to be moved very gradually if we want to keep it safe. And of course, gold retains an important role if we just look at the very large holdings of gold by most central banks. So it is still not fully out of the equation, really. Well, thank you all. But it's just part of a portfolio. Yeah. Sorry, Melvin. Thank you all very much. In our time with Melvin Bragg is produced by Simon Tillotson. From the makers of the Battersea Paltgeist, a new podcast series for BBC Radio 4. Uncanny.

Do you believe in ghosts? No. Have you seen one? Yes. Real life stories are supernatural, told by the people they happen to. Presented by me, Danny Robbins. There is a very strong sense of pure evil. Subscribe to Uncanny on BBC Sounds.