2 - The Gold Standard: Theory

Summary

The gold standard, a variant of a commodity money standard, was the prevalent monetary arrangement in the world from 1880 to 1914. England was the first country to adopt a gold standard (de facto) in 1717, the rest of the world followed over the next two centuries, and, by the 1870s, virtually all had abandoned bimetallism and opted for gold.

Commodity standards based on silver and gold bimetallism and silver and gold monometallism emerged as part of the evolution from barter to a money economy. Primitive monies were commodities. The precious metals because of their special properties – they were durable, easily recognizable, storable, portable, divisible, and easily standardized – ensured their universal adoption as monies. In addition to the properties of precious metals that made them desirable as a standard of value and medium of exchange, they were also viewed as a good store of value because new production was limited relative to the existing stock and because, via the operation of the classical commodity theory of money, the money supply would vary with the profitability of gold production, in turn ensuring long-run price stability. Indeed the classical economists admired the gold standard for its automatic qualities – the operation of the commodity theory of money providing long-run price stability for the gold standard world as a whole and the price-specie-flow mechanism preserving the uniformity of prices between countries on the standard.