A gold standard is adopted when a country establishes convertibility, at a fixed official price, between its currency and gold, thereby implicitly limiting its circulating money to the amount of gold it holds.Applied internationally, a gold standard establishes fixed exchange rates among different national currencies. Balance of payment settlements are made by transfers of gold.
An international financial system based on the gold standard emerged during the nineteenth century. Britain, already on a de facto gold basis, formally adopted the standard in 1821. From the 1870s through World War I, most European and Latin American nations as well as Japan and the United States abandoned bimetallic standards, which based currencies on both gold and silver, and embraced the gold standard. Not only was it economically advantageous to join the currency standard used by the world’s major industrial and financial power, Great Britain, but a huge rise in world silver production made it impossible to maintain a stable price between gold and silver, further undercutting bimetallism.
In the United States, the Coinage Act of 1873 officially demonetized silver, legally confirming a gold‐based currency that—because of silver’s relatively high price—was already the de facto standard. As gold entered a prolonged period of deflation, however, farmers joined U.S. silver mining interests in denouncing this “Crime of ’73.” Advocating “free coinage of silver,” they vocally embraced the new agriculturally based Populist party. In 1896 the free silver forces captured the Democratic party, as presidential candidate William Jennings Bryan excoriated bankers and other monied elites for sacrificing the interests of common people. The Republican candidate, William McKinley, argued that the gold standard would enhance trade and financial ties with the “civilized” world and stabilize banking and credit. McKinley’s victory led to passage of the Gold Standard Act of 1900, fixing gold as the basis of the U.S. currency.
The international gold standard worked fairly well between 1870 to 1913, and economists came to accept the idea that it was important to global prosperity and peace. After World War I forced many nations to abandon the gold standard, most policy makers and theoreticians urged its restoration. Throughout the 1920s, international conferences, economic advisers, and central banks all worked for this goal. By 1926 the gold standard was functioning in nearly forty countries with the exception of communist Russia and China. But the system proved too inflexible to counteract the banking crises of the late 1920s, which touched off the Great Depression of the 1930s. Great Britain abandoned the gold standard in 1931, and most nations, including the United States, followed.
