Since the beginning of civilization, goods and services have been exchanged. In the early beginning, bartering was common practice. With this person-to-person or party-to-party trade system, undesirable or unnecessary things could be given up for something useful or needed. Eventually though, currency was adopted for quickness, efficiency and more universal standards.
Historians and numismatists tend to agree on 600 BCE as the date in which the first official currency was minted in Western Asia Minor. Fast-forward to the Great Recoinage in England, and physically hammered coins were replaced with milled coinage from machines, again allowing for more widespread standardization. In general, these events fall during the Bimetallic System, Gold Standard or Bretton Woods Agreement, as described below.
A Brief Timeline of Our Monetary System
Although the following list is not comprehensive, it pinpoints some important milestones in world economic history.
- 1821-1871: The Bimetallic Standard is used by governments. Gold and silver are verified tender.
- 1879: The U.S. begins to use The Gold Standard.
- 1900: The U.S. passes The Gold Standard Act, making gold the standard method of payment and the backing for paper currency. It also put an end to silver and gold being traded for one another.
- 1914: World War I ends the height of gold and the collaboration between different countries via The Gold Standard. Paper money is adopted and traded for gold or silver as a type of dual monetary system. To combat political, economic, legislative and social troubles, The Federal Reserve is established.
- 1928: The Gold Standard is re-established with a widely adopted gold-exchange standard and central bank gold reserves with currencies that were convertible into gold at rate of exchange.
- 1929: The U.S. stock market crashes. Bank rushes and gold hoarding cause banks to shut down.
- 1931: Britain stops using The Gold Standard.
- 1933: The Gold Standard in the U.S. ends.
- 1934: The Gold Reserve Act ends private ownership of gold without a license.
- 1939: World War II begins.
- 1944: 44 countries came together at the United Nations Monetary and Financial Conference to establish the Bretton Woods Agreement for the United States dollar.
- 1961: The London Gold Pool is established by eight nations to hold the US $35 peg.
- 1971: Saw the end between the paper dollar and gold for the second time as President Richard Nixon no longer allows for gold redemption.
Pre Gold Standard – Bimetallic Standard
A Bimetallic System used gold and silver as official tender from the government. In this system, they were allowed to set the gold/silver ratio which acted as the rate of exchange between the two types of precious metals.
The Bimetallic System enjoyed popularity in Western countries from as far back as the Roman and Persian Empires, up through the 19th Century among world economic powers such as England and France. Supporters of the Bimetallic Standard said that it allowed for a greater monetary reserve, as well as more assurance around price stability. They said that it created efficient determination and stabilization of international exchange rates too.
However, this Bimetallic System did not remain the standard forever.
The Gold Standard
The Gold Standard was a monometallism (one metal) system created between 1696 and 1812. There were four types of Gold Standard, which included:
- The Gold Exchange Standard
- The Gold Bullion Standard
- The Gold and Fiat Money Standard
- The Gold Specie Standard
Each was entirely backed by the value of physical gold, with gold coins and redeemable paper notes being the exchangeable currency forms. It was first adopted by England, but other countries like Germany did soon after. It acted as a metric system centered on a fixed quantity of gold that set a universal framework for money and replaced the use of silver as the main metal for fiscal money around the world.
Additionally, its exchange rate system used a floating exchange rate system rather than a fixed exchange rate system. Surprisingly, the United States was one of the last to do so because of a large silver lobbying effort. Although dates may range, a “classical gold standard” or “true international gold standard” was in existence from the 1870s to 1914.
English economist John Maynard Keynes defined the responsibilities that governments and central banks had under The Gold Standard through this idea of the “Rules of the Game.”
- In ordinary times they established and upheld a fixed gold price, and exchanged gold for domestic money.
- During the buying and selling process, they could alter gold points with “gold devices.”
- In crisis times, they could put off The Gold Standard.
Advantages and Setbacks
As time went on, proponents of The Gold Standard recognized the following advantages.
- It put parameters on entities, government and banks around controllable price inflation, as they cannot add to the existing money supply.
- It helped fight deflation.
- It facilitated global trade with standard exchange rates for global trade.
- It stabilized the gold reserve with exports done in gold.
However, this system did not come without its opponents. One con was that the supply versus demand created head starts for gold-producing or gold-rich nations, forming an unfair equilibrium between participants. Even if supplies opened up, it takes time to process gold. Furthermore, not only were sourcing, mining and production practices expensive, but social and environmental impacts received little focus. Likewise, it hindered preventative actions for recessions, as entities couldn’t control money supplies. And lastly, it had limited economic/socioeconomic benefits.
Post Gold Standard – The Bretton Woods Agreement
The last of the three time periods regarding The Gold Standard came in July of 1944, when The Bretton Woods Agreement was drafted in New Hampshire. Seven hundred thirty representatives drafted guidelines and regulations that established fixed international currency exchange rates for a global scale. Its three main purposes were to: stimulate economic growth, prevent currency exchange rate volatility, and create a currency peg with the U.S. dollar. At this time, gold and the dollar were set to US $35 per ounce.
Although this system was terminated in 1971, it did create two outputs that are still in existence today. On one hand, it established the International Monetary Fund (IMF). The IMF is a global financial institution comprising 190 countries. As part of each country’s membership, it receives emergency savings determined by its rank in the world economy and surveillance reports on expansion opportunities versus economic weak points. Aside from lending, they are empowered with capacity development for tax infrastructures, reporting systems for economic benchmarks and technical training for humanitarian issues (income disparities, gender parity and global warming).
On the other hand, it created the International Bank for Reconstruction and Development (IBRD), aka The World Bank. The World Bank presently encompasses five institutions and 189 member countries. It also tackles human liberty and poverty issues around accessible electricity, green energy, comprehensive refugee support, primary and secondary school retention rates and exhaustive coverage for healthcare.
Carrying on the Legacy of Gold
Although the United States currently has a fiat money system and The Gold Standard has come and gone from every other country too, that does not mean that the desirability or intrinsic value for physical gold has gone away. Many people buy gold for a variety of reasons, including as a potential way to help in protecting the value of their holdings. Find out more about why people still buy gold today.