Eichengreen, Barry. "The Gold Standard". In Globalizing Capital: A History of the International Monetary System, by Barry Eichengreen, 14-47. Princeton, NJ: Princeton University Press, 2008.

Eichengreen, Barry. "The Gold Standard". In Globalizing Capital: A History of the International Monetary System, by Barry Eichengreen, 14-47. Princeton, NJ: Princeton University Press, 2008.

• Formal meetings to decide the structure of the international currency regime, as during the Bretton Woods Agreements, are actually the exception, with most international currencies systems and rules in international finance coming about from precedent and the individual actions of countries (14).
• Contrary to most economic histories, the gold standard was not the dominant currency regime prior to 1914, but instead was a recent invention that was adopted in Europe only the 1870s and became global in the late 1890s (42).
• Coins throughout history have been minted from precious metals and denominated by weight, with silver being the dominant metal for specie since the Medieval period and into the modern era. Silver was used because copper and gold were too heavy and light, respectively, to be easily used in transactions. By the 1300s, gold was again common in Europe, but only for large transactions (15).
• There were some exceptions to the standard use of silver, such as Sweden, which capitalized on its large copper mines by establishing a copper standard in 1625. This was a horrible idea because currency was still based on weight compared to the silver standard, so wagons were now needed to carry currency for many transactions (15).
• During the period before an official gold standard, international loans were repaid in a currency set in the loan agreement, usually in a mix of gold, silver, and copper coinage. The end result of the loan was that the actual amount of money circulating decreased in the debtor country and increased in the creditor country (16).
• The gold standard emerged as an international financial system by accident, largely due to the fact that Sir Isaac Newton's management of the mint in the 1710s did not set the price of silver high enough to counteract the glut of cheap gold imports from Brazil, causing most silver to be withdrawn from circulation as specie (14, 18). This accident was later made permanent by the prohibition of silver in any transaction over 25 pounds in 1774 and the complete abolition of silver currency in 1821 (18).
• At the start of the 19th Century, only Britain used the gold standard, while Russia, Austria, the German states, Scandinavia, and East Asian countries used the silver standard, and France used a bimetallic system (16). The French system was standard for bimetallic currencies, as it set the exchange rate between gold and silver specie and allowed contracts and tax obligations to be paid in either currency (16).
• Bimetallic currency regimes were difficult to maintain because they created opportunities for arbitrage if the price of gold or silver deviated from the exchange rate set by the mint. In these situations, traders could import silver or gold, exchange it at the mint for the fixed price equivalent in the other specie, and export the other specie for profit. Under extreme circumstances, this could result in nearly all silver or nearly all gold disappear from domestic circulation due to export via arbitrage (16-17).
• Arbitrage was limited because of operation costs associated with currency trading. First, the mint charged a fee, known as brassage, to change foreign bullion into currency, and, secondly, transportation costs between countries were significant. This meant that arbitrage was only profitable if the discrepancy between the official exchange rate and the market exchange rate was sufficiently large (17).
• Bimetallic currency regimes, like France, were essential to the overall function of the world economy because they allowed for exchanges between gold and silver through arbitrage. If the price of silver fell on the global market, then it would be exported to France for exchange to gold, meaning that France would absorb the excess silver until the prices normalized again. Additionally, speculation that arbitrage was about to become profitable led private actors to buy the excess metal, again buoying the declining value (18).
• Britain's use of gold as its sole currency, combined with its commercial might in the 18th and 19th Centuries led other countries to adopt a universal gold standard with currency values linked to gold at set rates (14, 21, 23). This was often an unintentional effect since other countries switching to the gold standard, or primarily gold currency systems, as the Netherlands did in 1816 and the USA did in 1834, flooded global markets with the metal dropped from circulation, disrupting bimetallic currency systems. The silver glut created by these switches forced France onto a silver standard system in practice by the 1830s (18-19).
• The international currency system because increasingly turbulent from the 1840s onwards, as new silver and gold discoveries and innovations in mining technology resulted in rapid changes in the relative value of currency metals. First, gold discoveries in California in 1848 and Australia in 1851 increased gold production tenfold, placing bimetallic countries like France on a de facto gold standard and flooding East Asian markets with excess silver. Then silver discoveries in Nevada in 1859 and the development of new silver mining technologies reversed these currency trends and switch bimetallic countries back to a de facto silver standard (19).
• The biggest reason why the bimetallic currency regime remained in place despite massive fluctuations in metal value from the 1840s onward was that the existence of simultaneous gold standard and silver standard systems meant that maintaining a bimetallic system facilitated international trade. This is demonstrated by many countries maintaining separate currency systems specifically for international trade: Sweden used the silver standard but established a gold-based system specifically to trade with Britain, while Argentina used paper fiat currency but conducted international accounts in gold (20-21).
• One theory, posited by Angela Redish, was that even small gold coins had too great a value relative to wages to be usable, since a small coin represented several days earnings, necessitating another form of currency. This could not be token coins made of non-specie metals because prior to the invention of steam presses, minted coins were irregular and could not be distinguished from counterfeits, meaning that another specie, like silver coinage, was necessary. This theory does not, however, explain why silver specie continued to circulate into the later 19th Century, when steam presses, which eliminated the issue of distinguishing between real and counterfeit token coins, were used in minting from the 1810s onward (19-20).
• Another explanation for the longevity of bimetallic currency system was that silver usage was politically supported by vested mining interests, since the use of silver specie provided markets and inflated prices, and that is was supported by populists, especially farmers, to increase the total money supply and inflation, thus reducing the value of their debts. This may have been true some places, however, examination of discourses on currency policy in Europe during the 1860s and 1870s did not show significant lobbying by mining or agrarian interests (20).
• The bimetallic system began to collapse during the 1860s through the increased threat of separate gold and silver, or gold and bimetallic, trade blocs forming and from variable fineness -- the actual percentage of specie metal in a token relative to its purported value -- of silver tokens in Europe (21).
• The disruption over fineness of currency began in 1862, when Italy reduced its token coinage to 0.835 fine, causing people to hoard the 0.9 fine French silver tokens and only use Italian currency to the point of greatly reducing the amount of French currency in circulation. France responded by reducing the fineness of its currency to Italian levels in 1864. Switzerland than changed its fineness and prompted a new crisis that drove Belgian, French, and Italian currency from circulation (21-22).
• This currency dysfunction was resolved in 1865 when France, Italy, Switzerland, and Belgium, later joined by Greece, created the Latin Monetary Union to set fineness at a 0.835 level for silver tokens (22).
• Another shock to the bimetallic system came during the Franco-Prussian War in 1870, as France, Italy, Russia, and Austria-Hungary all simultaneously suspended the convertibility of their currencies due to the need to circulate inconvertible paper currency. Since it could not longer use silver to trade with Russia and Austria-Hungary, but gold would be very useful for trading with the commercially dominant British Empire, Germany switched to the gold standard in 1871. The cost of this transition was paid for using the French war indemnity, as the 5 billion francs were sold for gold to make possible an orderly transition to the gold standard (22). This move further flooded global silver markets, reducing the appeal of a bimetallic system, and meant that both of Europe's premier commercial and industrial powers were on the gold standard (23).
• The gold standard was established as the global currency system gradually during the 1870s, as countries followed Germany in adopting the system. In the next decade, Denmark, Norway, Sweden, Netherlands, France, Switzerland, Greece, Italy, and Belgium all adopted the gold standard. Austria-Hungary and Italy did not officially adopt the gold standard, but pegged their currency's exchange rates for gold and silver to that of gold standard countries, as did the USA when greenback convertibility was restored in 1879. Russia and Japan adopted the gold standard in the 1890s, while India pegged the rupee to the British pound, followed by Siam and Ceylon. The silver-producing Latin American countries followed shortly after in the 1890s or early 1900s (23).
• By the turn of the 20th Century, only China and a number of minor Central American states still used silver standard currency (23).
• Gold standard countries had certain ways to encourage imports of gold and discourage currency flight, such as extending cheap government loans to gold importers, sending central bank agents to convert imports at ports or custom's offices, and demanding that conversion into gold only happen at central bank offices (26).
• The global switch to the gold standard resulted in major deflation in prices and wages manifest from the 1870s onward, as the withdrawal of silver currency reduced the total money supply during a period of strong market growth (24). 
• There were significant political movements in many countries advocating a return to a bimetallic system to address deflation, but systemic inertia made this a difficult proposition. Unless a country could convince other large economies to adopt a bimetallic system, it risked being flooded with cheap silver, having its gold reserves exhausted, and having its international trade reduced due to the risks associated with having exchange rates determined entirely from market trends in silver prices (24).
• In the USA, this deflation produced the populist movement and an attempt to switch to a bimetallic system in 1878, but which was blocked by Britain and Germany (25). In previous decades since the silver boom of the 1850s, populations had become acclimated to high rates of silver-based inflation, so the deflation after the 1870s had a major impact on indebted populations in the USA (24).  
• The populists were focused on reintroducing silver currency as a way to stop deflation by bridging the gap between global output growth and growth in the gold supply. The 1890 Sherman Act achieved this by reintroducing silver currency, but this growth in the money supply was offset by a trade deficit that resulted in a reduction of gold in circulation, reaching a critical point in 1893 and causing investors to convert US dollars into European currencies (41).
• Victories for Presidents Grover Cleveland and William McKinley secured continued US dedication to the gold standard, but confidence in the convertibility of the US dollar was still low. The populist and 'free silver' movement only ended in the late 1890s, as new gold supplies in South Africa, Australia, and Alaska, as well as new methods using cyanid to extract gold from impure ore, led to an increase in the money supply. The development of fractional reserve banking during this same period also led to a large expansion in the credit supply and functional money supply (41-42).
• Thee gold standard system of the early 20th Century was not, however, a pure gold standard. Only Britain, France, Germany, the USA, Belgium, and Switzerland held their reserves in gold, while most other states held either all or the majority of their reserves in the form of foreign currency that could be converted to gold, such as francs, dollars, marks, or pounds. Moreover, many countries still kept silver in domestic circulation and then allowed it to be converted to gold for foreign exchange through a central bank; only Britain, France, Germany, the USA, Russia, Australia, Egypt, and South Africa either abolished silver currency or ceased minting new silver currency (25-27).



from page 26	Primarily gold used in domestic circulation	Primarily domestic currency is not gold
Reserves held in gold	UK, Germany, France, USA	Belgium, Switzerland
Reserves partially in gold and partially in foreign currency	Russia, Australia, South Africa, Egypt	Japan, Netherlands, Denmark, Sweden, Norway, Austria-Hungary
Reserves entirely in foreign currency		Philippines, India, Latin America

• In the USA, silver currency was no longer generally issued after 1873 (23), but its minting resumed after the Bland-Allison Act of 1878 required the US government to purchase silver and reimburse silver miners in silver-backed currency or its equivalent in gold. This system, and its replacement in the 1890 Sherman Act, was created to satisfy the mining interests of the Western states to secure their support for protectionist tariffs popular on the East Coast. The USA switched to an entirely gold-based system in 1900 under the Gold Standard Act (26-27).
• The British pound was the most significant reserve currency, constituting 40% of global reserves, with the French franc and German mark making up another 40% of reserves. The practice of keeping reserves in foreign currency was particularly pronounced in India, Japan, and Russia. Together, these states held two-thirds of all global foreign reserves (27). The shift to foreign currency reserves was driven, in part, by a shortage of gold supplies following the 1890s (43).
• This system was greatly advantages to the countries that controlled the reserve currencies, as other states were required to hold a portion of these reserves in that nation's banks. This increased the amount of capital available for investment to countries issuing reserve currencies, primarily Britain, France, and Germany (27-28).
• This created a great risk that a crisis in one country could metastasize across the entire financial system, as worries about the convertibility of any major reserve currency would result in a general crisis that would endanger the convertibility of multiple currencies whose central banks held the initial crisis currency as a reserve (43).
• Countries regulated their monetary supply under the gold standard in different ways. Britain, Norway, Russia, and Japan had fiduciary systems whereby all currency had to be backed by gold except a limited amount that the central bank was permitted to print beyond this. Belgium, Netherlands, and Switzerland had proportional system by a certain proportion, usually 35% to 40%, of domestic currency in circulation had to be backed by gold or foreign reserves. Other countries used a mix of these systems (28).
• Thinking about the gold standard has been largely based on David Hume's 18th Century price-specie flow model. It holds that when a trade imbalance occurs, more gold is flowing out of a country that is going in. When this happens, the money supply in the debtor country decreases, deflating prices and wages, while the money supply in the creditor country increases, causing inflation. This change in relative prices should then change the competitiveness of exports and rectify the trade imbalance (29-30).
• This model failed to account for two major factors: the changes to gold flows due to international finance and lending, which often outstripped the commodities trade; and changes in the gold supply due to mining (30).
• Both the price-specie flow model and later models also failed to account for the fact that most central banks were private and thus responded to private interests instead of national interests. This meant that central banks often adjusted discount rates based on remaining a competitive lender in financial markets, not on correcting trade deficits (32).
• Models also did not take informal and political pressures into account, as central banks were under pressure to allow debts to grow to maintain high levels of economic growth by not limiting the money supply or the credit supply, as that would slow economic growth, which was very unpopular (32).
• These models also failed to account for pressure from governments, whose debt was serviced by central banks. The political dependence of most central banks, even though they were private institutions, meant that central banks avoided raising discount rates even when trade deficits would normally compel this action (32).
• Countries developed a number of central banking practices to increase their effective control over the money supply. These often involved central banks keeping larger reserves of gold or convertible foreign currency than required by law so that they can release additional money into circulation by purchasing bonds should gold flow out of the country (29).
• Another example of central bank intervention in the economy was by purposefully reducing the money supply during the start of trade deficits to reducing the money supply and thus restore the competitiveness of domestic products (31).
• Central banks also control of the credit supply to affect national economies. Banks often borrowed money not available in their own reserves from the central bank, called 'discounting the bill'. The rate of interest on these loans, referred to as the 'discount rate', was raised or lowered to encourage or discourage banks from taking these loans. By reducing the credit supply, central banks could thus shrink the economy relative to trade partners, deflating goods prices and rectifying the trade deficit (31).
• It was also possible to use the powers of the central bank to limit the negative effects of trade deficits on domestic markets and employment by lowering discount rates and increasing money supply to counteract the effects of a trade deficit (34).
• The gold standard was never a well run or regulated system and central banks frequently competed in trade wars or adjusted their money supply and discount rates for reasons besides avoiding trade deficits during the entire period of its functioning. At no point did central banks actually collectively try to maintain a global trade equilibrium (31-32). 
• Central bank policies did, however, tend to mirror other central banks because the effects of a change of discount rates in Britain or other major economy would have an impact on global balance of trade and thus money supply in all other countries. No formal coordination existed, so, to prevent the dangerous fallout of adjusting discount rates without knowing the policies of other central banks, central banks everywhere based their policies on the actions of the Bank of England (35).
• The system broke down during periods of economic crisis, as it was no longer an option for a crisis country to adjust its money supply or discount rate on the model of the Bank of England. It thus needed coordination among central banks to prevent a collapse of that country's convertibility (35). 
• The success of the gold standard hinged on expectations about the behavior of central banks and national governments regarding currency, particularly a common goal of maintaining convertibility (33). This common focus on convertibility came at the expense of other monetary policy goals, largely because the debtors and the working class, who suffered under gold standard monetary policy, did not hold political power in the 19th Century (33-34, 43).
• This consensus created a stable investment environment with essentially no risk from currency trading. During moments when a currency's exchange rate differed enough from the price of gold that it became profitable to exchange that currency for gold and reinvest it in a different currency abroad, private investors bought up assets in that currency on the assumption that the central bank would take steps to increase its currency value relative to gold, although this was often unnecessary due to the flow of private capital in expectation of this action (34).
• A common commitment to the gold standard also underwrote cooperation to contain financial crises. An example was in 1890, when the Bank of England faced major losses due to its debtor, Baring Brothers, losing millions of pounds when Argentina defaulted on these loans, loans from the central banks of France and Russia helped stabilize the economy and prevent a run on the pound. Such international efforts to maintain the convertibility and value of a major currency were absolutely necessary to the successful continuation of the gold standard (35-37).
• The expectation that governments would always maintain convertibility also meant that there was great faith placed in central banks, a mindset that prevented wholesale runs on central banks. This high level of public trust meant that central banks could become lenders of last resort during financial crises, and stretch their credit-reserve ratios dangerously low, without fearing a collapse of currency value (38). Similarly, countries could temporarily suspend convertibility with the general assumption that they would be solvent again when convertibility was restored (39).
• The common trust in currency convertibility and central bank solvency was limited to the European economic center and these assumptions did not extend to the economic periphery (39).
• Political movements in the Americas, particularly in the USA, drove many fears about insolvency and limits on the convertibility of currency to gold. In Latin America, this was mainly fears that loans would not be repaid, thus reducing foreign investment. Across the entire Americas were fears about political pressure to reintroduce a bimetallic system and a lack of commitment to the gold standard (40-42)
• Partially, this was because many non-European countries did not have central banks, with the USA not establishing its central bank until 1913 and most Latin American countries not until the 1920s. The absence of central banks also worsened the effects of crises, as there was no body about to prevent or limit the negative effects of trade deficits and the resultant deflation (40).
• This trust and consensus began to break down in the 1900s as tensions between Britain, France, and Germany reduced incentives for banking cooperation and the expansion of political rights, suffrage, and the organization of working class groups exposed monetary policy to pressure to prioritize other monetary goals besides convertibility (44).
• The success of the gold standard was intimately linked to the contemporary liberal dedication to free trade and open markets, as the adjustment mechanism only functioned under conditions of unrestricted trade between nations (43).
• The gold standard eventually collapsed due to the instability created by its combination with fractional reserve banking. Since modern banks only held a fraction of deposits are any given time, they were exposed to bank runs, which, in turn, exposed the whole financial system to collapse. The solution, to empower central banks as lenders of last resort, was inconsistent with gold standard rules and thus exposed a contradiction in the system (15).
• Awareness of central bank's roles as lenders of last resort was really started by the 1866 Overend and Gurney crisis, during which the Bank of England, concerned for its own reserves, refused to extend credit to banks facing runs due to widespread investor panic following the collapse of the prominent firm,  Overend and Gurney LLC. The failure of the Bank of England to extend credit to other banks worsened the crisis, which severely damaged the British economy (37). 
• The Bank of England, and other central banks, learned from the Overend and Gurney crisis and were more willing to extend credit during moments of financial crisis in the future (37-38).
• Being a lender of last resort conflicted with the constraints of the gold standard because both strained the central bank's reserves. During a financial crisis, investors would flee imperiled markets by converting national currency to gold, thus reducing the central bank's gold supply. At the same time, the central bank was supposed to extend greater amounts of credit, thus increasing its liabilities in gold. If gold reserves dropped to a point where further conversion was not allowed by law, then the central bank would face a run as both domestic and foreign markets lose faith in currency convertibility and value (38).
• Central banks often had 'escape clauses' in their charters that allowed them to convert reserves into gold during times of crisis to maintain trust in currency convertibility. In addition, countries allowed for temporary suspension of currency convertibility during times of crisis (38-39).
• The rise of the USA as the world's largest economy by the turn of the 19th Century exposed the entire gold standard system to new risks from the large agricultural, cash-heavy, and deeply indebted US economy. America's agricultural focus and rudimentary rural banks meant that it experienced seasonal demands for hard cash that banks had difficulty meeting; whenever bank credit looked overextended, which was often, American investors would convert US dollars into gold, thus substantially reducing global gold supply on a regular, but fluctuating, basis (43).
• Some countries, such as the USA prior to 1913, did not have a central bank. The function of lender of last resort was thus filled by the private sector, often through the cooperation of major banks. This could be accomplished by private banks temporarily taking control of a failing bank and supplying it with liquidity to deal with a bank run. In larger financial crises, major banks would organize coordinated bank holidays and simultaneously halt the convertibility of deposits into cash (39).
• This private system actually prevented financial crises from threatening the convertibility of the US dollar into gold because they created a situation in which cash money could be used to purchase bank holdings at less than face value, resulting in an increased demand for cash dollars and thus the exchange of gold for US dollars during financial crises (39).