The classical gold standard

Britain had been on a de facto gold standard since the early 1700s and restored the convertibility of the pound into gold in 1821, after the Napoleonic Wars. From 1871 to 1873, the newly united German Empire switched to gold, helped by the French indemnity paid after the Franco-Prussian War, and in 1873 the United States stopped coining silver dollars in the Coinage Act. France, Belgium and others of the Latin Monetary Union moved the same way, and by the 1890s most major economies, including Russia (1897) and Japan (1897), were on gold. Under the system, each currency was defined as a fixed weight of gold and could be exchanged for it.¹²³⁴

The system grew from Britain's economic weight, with London the center of finance and the Bank of England as its guide, and from the trade and investment that followed railways and steamships. A common currency standard reduced exchange rate risk and made it easier to trade and lend across borders, which suited the first era of globalization. Silver's falling price after the 1870s and the political battle in the United States between gold and 'free silver' supporters, which culminated in William Jennings Bryan's 1896 campaign, showed that the system favored creditors and imposed deflation on farmers and debtors.³⁴

The gold standard collapsed in 1914 when governments suspended convertibility to finance the First World War. Britain returned to gold in 1925 and left it in 1931, and the United States left in 1933, and economists such as Barry Eichengreen argue that countries that left earlier recovered earlier from the Great Depression. After 1944 the Bretton Woods system tied currencies to the dollar, which was convertible to gold, until the United States ended convertibility in 1971. Debates over a return to gold continue, though almost no economist backs it.³