Gold Standard History :: Gold Bullion Standard: UK, US
Gold Standard History
The Gold Standard history, in modern times, dates back to 1704. Historically the Gold Standard meant the Bank of England was legally required to exchange paper money for a fixed weight of gold. The history of the Gold Standard changed to that of the Gold Bullion Standard in 1925 when the Bank of England was merely required to buy and sell gold at a fixed price. The mantle of stability passed to the US in 1934 and lasted until 1971.
Gold's value throughout history has been based on the price stability of this precious metal. For many centuries gold has been consistently used as the constant against which all other stores of value have been measured. The gold standard is a monetary system where the economic accounting unit is a fixed weight of gold.
History of the Gold Standard
In 1704, the British West Indies adopted a gold standard based on the Spanish gold doubloon. In 1717, Sir Isaac Newton, master of the Royal Mint, effectively put Britain on a gold standard by establishing a new mint gold : silver ratio.
It was not until 1821 that this was formalized, following the introduction of a gold sovereign to the British currency, in 1816. Other major economies followed: Canada in 1853 (British gold Sovereign and US Eagle), Newfoundland in 1865, USA in 1873 (Eagle) followed by Germany (Gold Mark) the same year. Australia, New Zealand and the British West Indies followed the British gold standard.
Historically the use of gold as a yardstick was formalized in the currency system adopted by Europe and America until 191.
The way it operated in the United Kingdom until 1914 was that the Bank of England was legally required to exchange paper money (Pounds Sterling) [fiat] for a fixed weight of gold [specie].
The price of an ounce of gold was set at £3-17-10 1/2d (Three pounds seventeen shillings and ten pence halfpenny) in 1717. This price for gold lasted for more than 200 years.
The Gold Standard before the Civil War
Gold Standard and Currency Deflation
1914 saw the beginning of the 1st World War in Europe. This saw the replacement of gold sovereigns with treasury notes.The British government suspended convertibility in order to fund military operations.
While producers of commodities other than gold were able to secure higher prices, due to the gold standard, gold mining companies were not.
Throughout the war gold mines had only one outlet - the Bank of England. This was due to the prohibition of the import and export of gold. This was satisfactory as long as costs were stable and as long as the currency received was perceived to be at par.
However, when it was perceived that payment was being made in depreciated paper and that the United Kingdom government was benefiting by selling the production abroad, free of depreciation, the mining companies were not best pleased.
In July 1918 a committee of British Empire gold producers approached the British government and indicated the rise in production costs, the decrease in output, and that gold was paid for in depreciated currency. They suggested a special grant be enacted. The British government flatly refused the proposal.
The real depreciation in the UK currency became apparent when the New York exchange was unpegged (the £ to $ exchange rate had been pegged at $4.761/2 throughout the war) in March 1919. The exchange rate had dropped to $4.35 by July.
Currency Rate Deflation Consequences on the Gold Standard
The Australian government succumbed to pressure from its gold mining community and removed the embargo on the export of gold from February 1919. Most gold was sold to the East.
On July 24 1919 African gold producers entered into an agreement to sell all gold to the Bank of England on condition they could sell it in the open market within 5 weeks of its arrival. Thus the producers could be paid in US$ and negate the currency exchange depreciation of £ Sterling.
The gold, in fact, was sold at gold par, but the resulting £ Sterling obtained represented a premium in paper, simply due to the fact that paper (sterling) had depreciated.
Gold Bullion Standard
In late 1919 the United Kingdom policy was to revert to an effective gold standard. In a preliminary action the Currency Committee recommended that £150m should be concentrated in the Bank of England. This had been achieved by 1920.
Eventually, Winston Churchill, as Chancellor of the Exchequer, introduced the Gold Bullion Standard in 1925. The gold bullion standard ran until 1931. Under the gold bullion standard the Bank of England was merely required to buy and sell gold at a fixed price.
in the wake of the stockmarket crash of 1929, the large divestment of gold out of the US, and the ensuing depression, the United Kingdom economy was not strong enough to support even the gold bullion standard and it was forced to suspend the gold bullion standard.
It was not until 1933 that the US abandoned the gold standard. This action allowed the US economy to improve following the period of banking instability caused by the removal of funds during the bank panics. The mantle of stabilizing the price of gold then fell to the United States.
FDR Ends Gold Standard in 1933
United States Role in Gold Price Stability
In 1934 the mantle of stability for the price of gold passed to the United States. Franklin Roosevelt, the US President, then set a price of $35 an ounce.
During 1939-1945 the UK gold stock was almost all used to fund purchases of war paraphernalia. Winston Churchill decided that it was impractical to return to a gold standard. Britain was effectively bankrupt.
In 1944 the International Monetary Fund was established which introduced an international monetary system where international currencies could be converted to US dollars which in turn were convertible to gold. This established the gold-dollar standard.
This lasted until August 1971, when Richard Nixon officially abandoned the dollar's link to gold. This was due to fiscal problems related to expenditures for the Vietnam War.
American private citizens were once again allowed to own gold.