A Brief History of the Gold Standard
The comments below are an edited and abridged synopsis of an article by Robert P. Murphy
To understand the current global monetary system, in which all of the major powers issue unbacked fiat money, it is helpful to learn how today’s system evolved. Before fiat money, all major currencies were tied to silver and/or gold. This international system of commodity-based money reached its peak under the classical gold standard, which characterized the global economy from the 1870s through the start of WWI in 1914.
Under the gold standard, a nation’s monetary unit is defined as a specific weight of gold. There is free coinage of gold, meaning that you can present gold bullion to the government to be minted into gold coins of the appropriate denomination in unlimited quantities. Alternatively, paper notes or coins issued by the government as official money can be presented for redemption in gold coins. Finally, under a gold standard, there are no restrictions on the flow of gold into and out of the country.
Arguments over the gold standard are not merely technical disagreements concerning economic analysis. Rather, the gold standard often serves as a proxy for sound money, which was a central element in the classical liberal tradition of limiting government’s ability to wreak havoc on society.
Murphy explains the gold standard’s basic mechanics, and highlights some of the major events in the world’s evolution from a global monetary system based on market-produced commodity money to the current framework, which rests on government-issued fiat monies.
Up for discussion: precious metals (the market’s money); fixed exchange rates vs. government price fixing; the colonial era through 1872—gold and silver bimetallism; US participation in the classical gold standard, 1873/1879-1914; WWI and its aftermath; the Great Depression and Bretton Woods; and the Nixon Shock and fiat money.