The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of gold. In other words, in such a monetary system, gold supports the value of money. Between 1696 and 1812 the development and formalization of the gold standard began as the introduction of paper money created some problems.
The US Constitution of 1789 gave Congress the sole power to mint money and the power to regulate its value. The creation of a single national currency made it possible to standardize the monetary system, which until then consisted of circulating foreign coins, mainly silver.
Because there was more silver than gold, in 1792 a bimetallic standard was adopted. While the officially accepted 15:1 ratio of silver to gold accurately reflected the market ratio at the time,6 after 1793 the value of silver steadily declined, pushing gold out of circulation, following Gresham’s law.
The problem would not be resolved until the Coinage Act of 1834, and not without strong political animosity. Hard money enthusiasts advocated a ratio that would put gold coins back into circulation, not necessarily to displace silver, but to displace small denomination paper notes issued by the hated then by the Bank of the United States. A 16:1 ratio was set which overpriced gold and reversed the situation by putting the US on the de facto gold standard.
By 1821, England became the first country to officially adopt the gold standard. The dramatic increase in world trade and production in this century led to major discoveries of gold, which helped the gold standard remain unchanged well into the next century. Since all trade imbalances between countries were settled with gold, governments had a strong incentive to stockpile gold in case of more difficult times. These stocks still exist today.
The international gold standard appeared in 1871 after its adoption by Germany. By 1900, most developed countries were tied to the gold standard. Ironically, the US was one of the last countries to join it. A strong silver lobby kept gold from being the sole monetary standard in the US throughout the 19th century.
From 1871 to 1914, the gold standard was at its peak. During this period, there were almost ideal political conditions in the world. The governments worked very well together to make the system work, but that all changed forever with the outbreak of the Great War in 1914.
