The Classical Gold Standard
A golden age of trade and growth
The Classical Gold Standard dominated the international trade system between 1870 and 1914.
Great Britain, a global commercial and economic power, operated on the gold standard from 1717. Due to its financial influence Britain’s trading partners saw advantages in moving from their own metallic standards to a full gold standard.
It has been shown that all cases of inflation during the nineteenth century, which saw delays in all countries moving to the gold standard, were not as ‘pronounced’ as those seen in the 20th (and now 21st) Century.
By 1880 the Classical Gold Standard was a basis for international monetary affairs and pegged exchange rates based on the gold bullion standard had been clearly established. The Classical Gold Standard was cemented by the passing of the US Gold Standard Act in 1900. The Standard allowed the free movement of capital which in turn financed and expanded trade. Twenty per-cent of the growth in global trade seen between 1880 and 1910 can be attributed to the stability of the gold standard.
Only England, Germany, France and the United States operated on a pure gold standard. Those countries not adhering to a full gold standard used paper, silver bullion and token coins. The coining of silver was still widely practised; the US operated a very loose bimetallism (despite outwardly presenting a gold standard) until the Gold Standard Act was passed. Under the Gold Standard, central banks were able to operate a fiat currency to some extent; both lender-of-the-last resort and fractional reserve banking operated throughout the Classical Gold Standard, and subsequent periods. However it is important to note that gold convertibility was still guaranteed between 1880 and 1914, which secured faith in the system and maintained stability.
Gold’s deflationary bias became apparent from the late 1870s into the early 1880s, when the price level in Great Britain fell by 18 per cent between 1873 and 1879 and a further 19 per cent by 1886. This was benign deflation, with gently falling prices and living costs, mainly due to the industrial revolution which saw an increase in productivity. During this era the need to invest in gold for protection was far less necessary.
The stability and success of the gold standard in the late 19th Century until 1914 was due to the success and stability it both supported and required. Von Mises believed the Classical Gold Standard provided the ‘sound money and politics’ which enabled the strong economic growth and times of peace to thrive. Politically, there was little need for intervention in the money markets due to the confidence in the gold standard.
World War I did not leave opportunity to discover would happen if the gold standard remained; Britain and the rest of the gold world (excluding the US) abandoned the gold standard upon the outbreak of war in 1914 in order to print money to finance the war effort. With the end of the gold standard meant sound monetary policy became a thing of the past. Henceforth gold investment became more comment than gold money.