Gold standard
금본위제
A monetary system in which the unit of account is defined by a fixed quantity of gold and the central bank or government converts notes into gold at that price. It was the basis of the international monetary system from the 1870s to 1914. After the First World War Britain and others revived it as a "gold-exchange standard", holding reserves in gold and in currencies convertible into gold, but country after country left it in the Great Depression. After the Second World War it survived in a limited form through the dollar in the Bretton Woods system, until the United States ended the dollar's convertibility into gold in 1971.
In depth
Under a gold standard each currency is defined as a quantity of gold, so gold becomes the means of settlement between countries and exchange rates are in effect fixed. Britain slipped into a de facto gold standard in 1717, when Isaac Newton as Master of the Mint overvalued gold against silver. The international gold standard began when the German Empire replaced its silver coinage with the gold mark in 1873 and other European countries followed, copying the system of Britain, the world's financial centre in the nineteenth century.
In principle the gold standard was described as self-correcting: a country that imported too much lost gold, its money supply and prices fell and its exports recovered, while a country gaining gold saw the reverse. In practice central banks defended their gold by raising discount rates to attract funds from abroad, which tightened domestic credit and weakened the economy. In the 1920s Keynes called these practices the "rules of the game".
In the First World War most countries suspended convertibility and printed money to pay for the war, and prices rose steeply. In 1925 Britain, under Chancellor Churchill, returned to gold at the pre-war rate of $4.86 to the pound, against Keynes's warnings of deflation. The interwar system was a gold-exchange standard in which reserves were held in pounds or dollars convertible into gold, and it was unstable because the Bank of England's reserve ratio worsened as its liabilities to foreign central banks grew.
In the Great Depression the gold standard carried the crisis from country to country. Defending gold meant raising interest rates and cutting spending, so governments were pushed into austerity as unemployment soared. In the summer of 1931 Austria and Germany suspended convertibility and imposed exchange controls, and in September Britain left gold. By the end of 1932 the gold standard had collapsed as a world system; the United States left in 1933 and the French-led gold bloc in 1935–36. A 2024 study of 27 countries found that leaving gold helped countries recover.
Barry Eichengreen, Peter Temin and Ben Bernanke hold that the gold standard transmitted deflationary shocks between countries and kept monetary authorities from offsetting banking panics, blocking recovery. Eichengreen gives three reasons for its collapse: pressure from suffrage, unions and labour parties to put unemployment before currency stability; capital flight that grew in every crisis; and the fact that the new financial centre, the United States, could not manage the system as Britain had. Others reply that the United States, with its huge gold reserves, was not prevented from expansionary policy.
The Bretton Woods agreement of 1944 kept the gold standard without domestic convertibility. Currencies were fixed to the dollar, only central banks could exchange dollars for gold at $35 an ounce, and International Monetary Fund credit cushioned adjustment so that countries losing gold need not go through deflation. The system ended when the United States unilaterally terminated the dollar's convertibility into gold in 1971. In a 2012 survey of 39 American economists, 92 percent agreed that a return to the gold standard would not improve price stability and employment.