In the first part of the history of gold, three periods were presented: the Classical Era, the Mediaeval Times and the Early Modern Times. Now follows the second part of the series, covering the period of the Classical Gold Standard (1816 – 1914) and the Interwar Period (1918 – 1939).
4. Classic Gold Standard (1816 – 1914)
British Pound becomes reserve currency: 22nd June 1816, Great Britain declared the gold currency as official national currency (Lord Liverpool’s Act). On 1st May 1821 the convertibility of Pound Sterling into gold was legally guaranteed. Other countries pegged their currencies to the British Pound, which made it a reserve currency. This happened while the British more and more dominated international finance and trade relations. At the end of the 19th century, the Pound was used for two thirds of world trade and most foreign exchange reserves were held in this currency.
American Civil War and Gold Speculation: Between 1810 and 1833 the United States had de facto the silver standard. The gold price was at US$ 19,39 for one ounce of fine gold. In 1834 (Coinage Act of 1834), the government set the exchange gold-silver exchange rate to 16:1 which implemented a de facto gold standard. The American Civil War (1861 – 1865) and the Black Friday at the New York Stock Exchange (24. September 1869) lead to spikes in gold price of US$ 591.12 and US$ 33,49, resp. per ounce. In 1879 the United States set the gold price to US$ 20,67 and returned to the gold standard. With the “Gold Standard Act” of 1900, gold became an official instrument of payment.
5. Interwar Period (1918 – 1939)
Return to the Gold Standard: During wartime, central banks abolished the gold standard to be able to print more paper money which should help to finance the war. At the 1922 conference of Genoa central banks proposed to return to a partial gold standard to foster international trade and economic stability. This was only a partial gold standard, as gold stayed in the central banks’ vaults. The gold was represented by paper notes. Further, citizens could not receive gold coins anymore in exchange for notes.
The uncoordinated return to the gold standard resulted in over- and undervaluation of important currencies and lead to the collapse of the new gold standard as a regulation of the international monetary system. Its collapse was prompted by the Bank of England’s decision in 1933 to suspend redeeming gold.
Prohibition of Gold in the United States: In 1933 Franklin D. Roosevelt prohibited the possession of gold by private citizens. Gold coins, bars and certificates had to be exchanged for a fixed price of US$ 20.67 per ounce. The only exception was gold for industrial or artistic purposes. The rationale was to prevent the circulation of privately owned gold which may have become a competing currency. A violation of this prohibition could result into a fine of US$ 100 (or US$ 1,708 at today’s value) or 10 years of prison. However, the biggest part of the population was not affected by this prohibition, as citizens still could keep up to five ounces of gold. Roosevelt’s prohibition was only abolished 40 years later. On 31st January 1934 the Exchange Stabilization Fund was established and the gold price was set to US$ 35.00 per ounce.
This was the second part of the history of gold. Cornerstones were the gold standard, its abolishment during the first word war, the financial crisis thereafter, and the prohibition of gold by Roosevelt.
- History of Gold – Part 1: Ancient History, Mediaeval Times and Early Modern Times
- History of Gold – Part 2: Classical Gold Standard and Interwar Period
- History of Gold – Part 3: Bretton Woods System
- History of Gold – Part 4: Bull and Bear Markets