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Rise and fall of the Gold Standard

30 May 2014, 14:36


Brief Introduction

We commence by stating that gold, silver and any metal deemed valuable in the eyes of the beholder has been used for thousands of years as a medium of exchange between people and countries seeking to accumulate capital and scarce resources.

The problem with this was that as nations grew larger and trade opportunities increased, a suitable system had to be placed in operation to handle the increasing complexities of an evolving financial world. We must examine the reasons for the rise and fall of the gold standard which truly was the solution to the increasing complexities of finances, trade and commerce. 

In part one we will examine the rise of the Gold standard from 1870, its operations, its strengths and international agreements between nations. In part two we will come to knowledge of our banking operations today. I take a different view than ww1 being the cause for the fall of the Gold Standard. The information imparted in part 2 is rather information that is not commonly revealed in textbooks, however the conclusion will reveal astonishing quotes of men who discerned the times and knew the truth about the dangers of banking institutions, more importantly lending money at interest. 

International monetary standards up to 1870

The international money system up to 1870 was characterised by differentiation between the silver standard, the gold standard and the bimetallic system which was silver and gold working in tandem according to their ratios which around that time was 15:1(a gold ounce was 15 times worth more than a silver ounce)

By 1870, the gold standard was far from being internationally used and put in practice. Outside Europe, the Orient and Latin America were on silver, and the US had inconvertible and depreciated notes issued during the Civil War still in circulation.

Rise of the Gold Standard

Momentum towards gold accelerated during the 1870's while silver declined rapidly in importance as an international standard. The sudden momentum was caused by two developments which drastically affected the relative prices of the two main monetary metals.

1. Several East European countries with which Germany had important trading relations had abandoned a silver standard for inconvertible paper leaving Germany with no advantage from holding to the silver standard in its commercial relations with these countries. Also most of Germany’s commercial relations with these European countries tended to be financed through Britain, which adhered to the Gold standard.

An international monetary congress held in Paris in 1867 had overwhelmingly favoured the adoption of a universal gold standard.  A large war indemnity extracted from France by Germany in 1871-1872 provided the means for bringing the desired gold standard about since France had large reserves of gold. 

So, in 1872 the German silver thaler was replaced by a new currency called the mark. Surplus silver stocks were used to buy gold in the bullion market to overcome the domestic shortage of gold for coinage purposes. Germany’s purchases of $243 million of gold placed such great pressures on the markets that the price of silver in terms of gold declined dramatically. The decline in silver was also brought about by the discovery of large deposits of the metal in Nevada and elsewhere thus increasing the world silver output.

By 1878, Britain, Belgium, Holland France, Germany, Switzerland and the Scandinavian countries were operating on gold, and since most other continental countries were using irredeemable depreciated paper money, silver was no longer an international standard of value in Europe.

[1]Dates when major nations adopted the Gold Standard

Britain 1821

Switzerland 1874

Germany 1871

Holland  1875

Sweden 1873

Austria 1892

France 1874

Japan 1897

Belgium 1874

Russia 1898

Italy 1874

USA 1900 *

N.B. Rules of the classic Gold Standard (1870-1914)

1. The unit of account had to be tied to a certain weight of gold.

2. Gold coins must circulate domestically and any bank notes in circulation must be convertible to gold on demand.

3. Other coins in use must be subordinate to gold.

4. No legal restrictions must be placed on the melting down of gold coins into bullion

5. There must be no impediment to the export of gold in any form.

Strengths of the Gold Standard from 1870 to 1914

Apart from the gold held by the central bank to back its paper money, a country’s gold reserves were its coins. Due to the considerable amount of coined gold in circulation and the high ratio of gold reserves to the money supply, domestic money was virtually equivalent to foreign exchange.

The major advantage of the gold standard was that it automatically maintains a stable exchange rate between countries operating within the system. The efficiency and honest working of the gold standard was surely one of the focal points that made it so favoured and much adhered to as more countries placed themselves on this system.

World War One(WW1) brings the Classic Gold Standard as we knew it to an end.


I would like to impart a different perspective on the fall of the Gold Standard which relates to interesting sections of history which must be considered before WW1 occurred.

The Gold Standard has always been a fascinating account to me personally when it came into being. The rise of the Gold Standard was an excellent solution for the problems of the 19th century, during which a combination of metallic standards were operating as was mentioned in the brief introduction.

Fractional reserve banking

’Fractional reserve banking is a time-honoured tradition beginning with the English goldsmiths of 1000 A.D. The goldsmiths, who at that time functioned as early bankers, discovered that they could lend out more in paper receipts for gold than they had of the actual metal so long as the majority of depositors never asked for their gold back. Fractional reserve banking is the tolerated, and now institutionalized, practice of banks lending out money they don't have and charging interest on it. In any other industry, this would be considered fraud.’

It should be noted that prior to WW1, that a new central bank came to be in the US when the Federal Reserve act was enacted on 23 December 1913 and as we shall see in the chart below, the value of the dollar significantly declined and that means only one thing, a vast increase in the money supply.

From history we know that the United States only entered WW1 in 1917, but yet the decline in the value of the dollar commenced at about 1914 when the Federal Reserve banks opened. It is obvious that the money supply increased by massive proportions as we see from about 1914. This also occurred during the American Civil War but it was government issuing the notes which means there was no interest to be paid on these notes. Inflation occurred every time bank notes were printed in hoards, however from the Civil War period there was no central bank, and thus the dollar eventually regained its strength since the debt could actually be repaid because of there being no interest rates released upon printing of each bank note.

As we see from 1914, the dollar is on the road to being worthless and its status as world reserve currency will most likely come to an end in our lifetime if one takes time to understand fractional reserve banking and interest. Mathematically and logically it can be proved that the whole operation produces only thing in the long run, debt, a gigantic mountain of debt. Consider this quote and you shall see there is only one conclusion to what the Federal Reserve was designed in the beginning for. "Let me issue and control a nation's money supply and I care not who makes its laws." (Mayer Amschel Rothschild, Founder of Rothschild Banking Dynasty)

Post war gold standard restoration sentiments

From the 1870’s to 1914 the world could not but be astonished at the magnificent Classic Gold Standard and how stable its operations were. Therefore we can only imagine how it must have been immediately after the war ended, hopes of a return to the good old days of full confidence in the monetary system and great prosperity.

From our perspective in 2014 it is easy to predict that after 1914 the Classic Gold Standard would never come to existence again because now we can see what the real cause was, the continuous pushing for central banks around the world but mainly the power of the Federal Reserve, which sadly no one could see was the actual culprit for the non-possibility of a return to the Classic Gold Standard. Fiat currency which is solely based on confidence was the new monetary system.

The end of all alternative Gold Standard techniques

Hyperinflation during WW1 caused major issues for the return to the Gold Standard. Most countries had lost gold while some actually gained. This is evidenced by the large increase in American gold reserves from $1,207 billion in 1914 to $2,658 billion by 1918 (recall that the Federal Reserve began operations in 1914). Viewing this in terms of world reserves, it is a jump from 23% to 39% in only 4 years. Unfortunately countries like Germany, Russia, Italy and Brazil suffered a loss of gold reserves during this period.

The new program of the Gold Standard operated like this, there was the Gold Exchange Standard and the Gold Bullion Standard. These forms of the Gold Standard:

1. Required a greater degree of management which involved the intervention of central banking and fiscal policies.
2. Restricted the redemption of currency into gold.
3. Suffered from trade restrictions and war debts.

The Gold Exchange Standard was the main operation since many nations were depleted of required gold holdings to back their currency. Thus, countries like Britain and the US were required to hold larger amounts of gold reserves because of other nations holding sterling and dollar as foreign exchange for reserves since these were based on gold. This is the operation of the Gold Exchange Standard.

The main problem with the whole system was that the US was the official world super power since it accounted for holding the most gold reserves. Thus with the creation of the Federal Reserve it could lend money to nations who needed financing. One of these nations was Germany which received a loan named The Dawes Loan.

The return to some form of a Gold Standard by most countries between 1925 and 1928 was equated with a deceptive boom because although it appeared that the restored Gold Standard was working well. Few realised the international economy was being funded by American loans, at interest. The Gold Exchange standard could only work as long as countries that were in possession of foreign currency were confident that the currency would hold its value in terms of gold.

Faith was lost in the sterling when Britain recorded its first budget deficit in 1931 since WW1, to the point where Britain left the Gold Standard in September 1931. Yet it is amazing how the US managed to increase its gold reserves between [4]1929 and 1931 from 38% to 40% despite it having entered the great depression. Of course the answer lies in its tremendous lending spree to various countries since 1914. It enjoyed repayments from the interest at which the money was lent.

The Federal Reserve contracted the money supply during the great depression worsening the already dire situation. In 1933 the end was marked for the Gold Standard because from [5]April 5, 1933 - President Franklin Roosevelt issued an order making it illegal to hoard gold coin, gold bullion or gold certificates. Violation of this order was punishable by a $10,000 fine or 10 years in prison, making it a felony to own gold. And then finally on June 5, 1933 - The United States abandoned the gold standard. All existing contracts and currency that required redemption in gold were no longer considered valid.’ [4] From 1933 to 1935 the US gold holdings in terms of the world reserve jumped from 36% to 47% thus making it more difficult for a return to the Gold Standard. It is my opinion that the magnitude of the Federal Reserves’ lending capabilities was the main stimuli which lead to the fall of the Gold Standard. There have been countless men in history who fought the central banks see only a few statements of many who protested against these institutions. 

The resolve for a stable monetary system internationally was brought about by nations adopting the Gold Standard. Britain was a large contributor to this Gold Standard since her influence as a leader in commerce and finances promoted the sterling as a stable and reliable currency which was redeemable in gold from about 1821. From the 1870s we saw major nations adopting the Gold Standard and the most important one being the US.

The main dividing line between all the causes of the fall of the Gold Standard was the operation of the Federal Reserve which began in 1914. Her power to accumulate incredible reserves of gold through lending at interest has prevented a stable overall gold reserve holding by major nations. We also saw that from 1925-1928 a deceiving boom occurred because of few nations realising that the US was basically funding the operation through its lending capabilities. In 1933 the US abandoned the Gold Standard which marked its end since the US had the most authority by its massive gold stocks. To understand why the central bank was of such focus I end with a few quotes by prominent men.

"Whoever controls the volume of money in our country is absolute master of all industry and commerce...and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate." (President James A. Garfield, 1881)

"A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men ... [W]e have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world--no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men." (Woodrow Wilson, The New Freedom: A Call for the Emancipation of the Generous Energies of a People)


Growth of the International Economy 1820-2015, Fifth edition, Micheal Graff, A.G. Kenwood and A.L. Lougheed, p. 98 (consulted for part 1)

ECS2608 study guide for UNISA, p.43 (consulted for part 2)

Encyclopaedia of banking and finance, Boston, 1983, p.439



[4] Statistical year-book of the League of Nations 1931/32, Geneva, 1932, pp. 266-69; Statistical year-book of the League of Nations 1939/40, Geneva, 1940, p. 216.


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