The Gold Standard

In our analysis of the Gold Standard in the U.S. and the World, we will be focusing on 1870's to the beginning of the First World War and from the end of the First World War up until 1936 when some of the last major countries went off.

Before the First World War, the gold standard was a successful means of stabilizing the currency. This is due to, on part, the Bank of England, which since 1694 had let the international system. The Bank of England did this by provided management and incuding cooperation. This made for a stable system because the Bank of England could easily adjust for imbalances in the system.

After the First World War was over the countries that managed to get back on to the gold standard found it very unstable. This was not the gold standard they remembered, the credibility was weakened by the destroyed economies, the financial problems such as large government debt, hyperinflation, and now there was no international leader like there had been for hundreds of years. Speculators attacked currencies like the British Pound by demanding gold for their pounds which lead the the bank collapsing in 1931.

Going back off the gold standard was not so bad. Once off the gold standard, central banks would be able to pursue expansionary policies and combat deflation. If the currency is not dirctly linked to the supply of gold, policy makers are free to increase the money supply. In hindsight we now see that those who got off the gold standard early such as Britain and Scandinavia, recovered sooner. Those who got off later such as France and Belgium, recovered later.