The Gold Standard — The Age When Gold Ruled the World

Up to the previous episode, we watched the frenzy of the gold rush. It was an age when, on the riverbanks of California and Australia, ordinary people dug the earth dreaming of sudden riches. As a result, an unprecedented quantity of gold was dug out of the world. So where, then, did that immense gold go? Much of the gleaming placer gold and bullion was, in time, melted down, stamped, and transformed into an ‘anchor’ that supported the currencies of various nations. What we trace in this episode is the age when the 19th-century world was bound together under a single mechanism called the gold standard, and gold reigned as the very center of international currency. We also want to look, together with that, at what kind of rigidity that golden chain harbored even as it brought stability and prosperity.

The golden anchor — what was the gold standard?

The gold standard, put in a word, was a mechanism that tied the value of a currency to a fixed quantity of gold. For example, a nation would promise that ‘one pound can be exchanged for this much gold,’ and if you brought in banknotes or coins, you could have them converted at any time into a set amount of gold. It was precisely because of this guarantee of convertibility that people trusted what were merely scraps of paper or pieces of metal and used them in transactions with peace of mind. The backing of money’s value rested not on a government’s verbal promise but on gold itself, which neither rusts nor diminishes.

The foundation of this mechanism is said to have been laid by an unexpected figure: Isaac Newton, known for the law of universal gravitation. He was a scientist and at the same time spent the latter part of his life as Britain’s Master of the Mint. In 1717, the official ratio of gold to silver that Newton set ended up driving out silver coin and is said to have tilted Britain toward a de facto gold-centered system. And in 1816, Britain formally organized this gold standard into a legal framework through the Coinage Act. That a nation which was coming to hold global hegemony chose gold left a great influence on the later international order.

Entering the latter half of the 19th century, this mechanism spread beyond the system of a single nation. In the 1870s, taking as one occasion the newly unified Germany’s adoption of the gold standard, the major nations of Europe are said to have followed suit one after another. Because each nation’s currency was tied to gold, the exchange ratios among them were automatically set as well. In this way, the currencies of separate nations became connected through the common measuring stick of gold, and transactions across borders grew far easier.

London’s gold market — gold as the center of the world

For the international gold standard to function, the part that became its heart was London. At the time, Britain held a trade network spread across the entire world and a financial district called the City, reigning as the center of international finance. Gold produced in various places around the world is said to have first gathered in London, been traded there, and then been distributed once more out into the world. London’s gold market was, so to speak, the node that governed the global circulation of gold.

What is known as the symbol of that gold market is the gold price-setting that is said to have begun in 1919, the so-called ‘fixing.’ Representatives of leading financial institutions, including the Rothschild firm, are said to have gathered twice a day to match buy orders against sell orders and settle on a single price where demand and supply balanced. The gold price set in this place was referred to as the standard for transactions all over the world. That the measuring stick for gold’s value was born from the agreement of a small room in London tells of just how great Britain’s influence was at the time.

This system centered on London was also bound inseparably to the prestige of Britain’s currency, the pound. The pound, backed by gold, was widely used to settle international transactions and is said to have gathered trust as the world’s key currency. It was not only in scenes where gold itself was directly exchanged; backed by the guarantee of convertibility into gold, pound-denominated bills and bonds circled the world — upon the credit of gold as a foundation, a refined mechanism of international finance was built.

Stability and prosperity, and a rigidity hard to see

From the latter half of the 19th century into the early 20th century, when the gold standard spread, was also an age when international trade and investment expanded greatly. If currency exchange ratios were stable by way of gold, merchants and investors could push forward with cross-border transactions and the movement of capital without fearing sudden swings in exchange. Prices, too, are said to have been comparatively settled over the long run, and the immovable anchor of gold brought a degree of predictability and trust to the world economy — this is the merit of the gold standard that has been most praised.

Yet behind that stability lurked a rigidity hard to see. To bind the quantity of currency to the quantity of gold held meant, turned around, that a government could not freely adjust the quantity of money. For example, even if it fell into a recession, unless gold increased it could not increase the currency as it wished, and it became hard to take measures to support the economy. The anchor that brings stability can, when it comes to the crunch, also become a weight that locks away movement — this two-sidedness had not yet surfaced as a great problem at the time, but it was built into the depths of the system from the very start.

Over whether the gold standard was right or wrong, debate continues to this day. While there is a position that values it for putting a brake on loose finances and excessive inflation by fixing currency value to gold, there is also a position that criticizes it for being unable to respond nimbly to economic fluctuations and thus possibly deepening recessions. It is hard to declare that either one is correct, and its evaluation has diverged greatly according to era and circumstance. Here, what we want first to take in calmly is the fact that the gold standard held two faces together — stability and rigidity.

When the golden chain is put to the test

The 19th-century world was thus bound together under a single order centered on gold. The currencies of various nations were tied to gold, London’s gold market governed that circulation, and gold reigned in both name and substance as the anchor of international currency. It may be said that this was, among all the roles humanity gave to gold, the most systematic and the most global in scale. Whereas the kings of antiquity made gold a symbol of divine majesty, the modern world re-set gold as the foundation of a coldly rational economic order.

Yet however finely a mechanism is built, it is put to the test before a storm exceeding all expectation. What the gold standard presupposed was, so to speak, the stability of peacetime. As long as the economy grew smoothly and nations trusted one another, the golden chain worked as a supple bond. The question was what would happen when that premise collapsed. When the anchor that should have been the symbol of stability transformed, amid crisis, into a chain binding people’s hands and feet, the world would learn for the first time the weight of the gold it had itself bound together.

Not long into the 20th century, that trial became reality. Amid the Great Depression that would come, the gold standard that had supported prosperity transformed into a fetter binding people to the bottom of deflation. Just whom did the golden chain bind, and how? — In the next episode, we step into that bitter story.