10 - The first global financial market and the classical gold standard, 1880–1914

Summary

All the industrial core of the Atlantic economy and much of the European periphery were joined financially in the classical gold standard, 1880–1914. The US formally adopted the gold standard in 1879, but already in fact had kept the Civil War greenback dollar at par since 1873. Germany and the Scandinavian Monetary Union had switched from silver to gold in 1871. France and the other members of the Latin Monetary Union soon joined as well. Even the Ottoman empire declared its commitment in 1881. The standard justification for general adoption of the gold standard at the time was that it facilitated the expansion of international trade. Commitment to a gold standard implied as well a commitment to fixed exchange rate with the other countries on the gold standard, which in turn promoted a multilateral settlement of trade imbalances: a country's bilateral trade deficit with one trading partner could be offset by its surplus with a third trading partner.

But international trade had already expanded rapidly in the thirty years before the widespread adoption of the gold standard. In response to the free trade initiatives of Great Britain in 1849 and the continued drop in freight rates, due to the application of steam power both on land and sea, trade had grown globally in all basic commodities. Further, commodity prices had converged across the trading world as had never before been possible (O'Rourke and Williamson 2005). The Anglo-French Commercial Treaty of 1860 with its most-favored nation clause had promulgated a general round of tariff reductions throughout Europe. Each succeeding negotiation between any pair of countries that included a reduction in tariffs had to include the same reduction with the countries whose previous treaties had included the proviso that their future tariff barriers would never be higher than that of the “most favored nation.” The free trade movement, however, started to lose momentum just when the gold standard spread within Europe and eventually beyond to Russia and Japan in 1895.

There was a general rise in tariff barriers, led initially by the US and Germany and eventually even France, the major countries responsible for moving from bimetallism or silver to a gold standard in the first place.