Forex: Introducing the Gold Standard

The origins of international monetary relations, like those of money itself, are shrouded in the obscurity of prehistory. There were well-defined monetary areas in many parts of the ancient world.

But it is only with the rise of the Roman Empire that we begin to find documentary evidence of a very explicit international monetary order. The Roman monetary order, which was based initially on the gold coinage of Julius Caesar and later on the gold solidus (bezant, nomisma) for Byzantium, lasted some twelve centuries in all.

Though confronted from the seventh century on with competition from a silver bloc centered on the newly emergent Muslim dinar, the Roman system did not break down completely until the sacking of Constantinople in 1203.

The next five centuries were characterized by fluctuating exchange rates and a succession of dominant moneys--- the 'dollars of the Middle Ages', one source has called them. Including in the later years, the Florentine fiorino, the Venetian ducato, the Spanish reale, and the Dutch florin.

After the beginning of the Industrial Revolution, it was the British pound sterling that rose to a position of preeminence in world monetary affairs.

As its name implies, the pound sterling was originally based on silver. In fact, however, England began practicing a loose sort of bimetallism--- gold coins circulating alongside silver ones--- even as early as the fourteenth century.

Gold coinage was first introduced into England in 1344, during the reign of Edward III, and Gresham's Law was coined during the reign of Queen Elizabeth I.

Sir Isaac Newton, as Master of the Mint, tried to cope with the problem of bad money driving out good by calculating the value of the gold guinea (named after the region in West Africa where gold was mined) in terms of silver shillings.

And in 1817, gold was formally declared legal tender in England alongside silver. From the time of the Napoleonic Wars, the United Kingdom moved rapidly from bimetallism to a single-money system.

In 1798, the free coinage of silver was suspended and a 25 sterling pound-limit set in the legal-tender power of silver coins. In 1816, silver's legal-tender powers were further limited to 2 sterling pounds.

And after 1819, silver could no longer be used to redeem circulating bank notes; paper could be redeemed in gold coin only.

From that date onward, the pound was effectively based on gold alone . The British were on a full gold standard.

It was only in the 1870s that the movement toward a full-fledged international gold standard picked up momentum, and its is from this decade that the modern history of international monetary relations is customarily dated.

In 1871, a parallel decision followed in the United States (the crime of '73), and by 1878, silver had been demonetized in France and virtually every other European country as well.

During this decade, the classical gold standard was born. During succeeding decades, it spread to encompass virtually all of the world's independent countries, as well as all of the various colonial empires of Europe.