The Rise And Fall Of The Gold Standard

by THE INVESTOR on June 8, 2023

This guest post on the ramifications of the demise of the gold standard is by Rob Dix. A long-time Monevator reader, Rob is co-host of the popular Property Podcast and co-founder of Property Hub. Rob is also the author of the Penguin bestseller The Price of Money.

You may have been taught as a child the golden rule, ‘Do unto others as you’d have them do unto you.’ A more cynical golden rule was made famous in the movie Aladdin: ‘Whoever has the gold makes the rules.’ But a more accurate (if less pithy) formulation might be, ‘Whoever has the power makes the rules about the gold.’

The amount of money in the economy has been increasing dramatically over the last 50 years, and the pace is only getting faster.

How is that even possible? Well, for most of history, it wasn’t. It was only in the latter part of the twentieth century that the brakes came off and the creation of money became so unrestrained.

So what exactly changed towards the end of the twentieth century? To understand that we’ll start with a quick romp through the history of money up to that point.

The Earliest Money

People exchanged goods with each other long before the development of physical money. ‘Tally sticks’ were used at least 30,000 years ago to keep track of who owed what to whom. Eventually, these were replaced by clay tokens. But both seem to have been used simply as claims of ownership: the tokens themselves weren’t traded between people.

The first physical currency appears to have been the Mesopotamian shekel, dating back somewhere around 7,000 years. Metal coins are more recent still – seemingly originating independently in China around 1000 BC, and ancient Greece around 650 BC.

Eventually, these small pieces of metal would become the dominant way of organising an economy.

The UK is a good case study – and not just because it’s where I live! Records go back a long way, and Britain was a major global power during a period when critical innovations in the history of money were taking place.

We’ll link back up with other currencies later, when we reach the twentieth century.

Coining it

Coins started being used in England as early as the second century BC. But it wasn’t until the eighth century AD that their use became widespread and the coins themselves more standardised.

These later coins were made of silver, and the name ‘pound sterling’ derives from a pound weight of sterling silver. This was important, because the value of the coin was in the metal itself. Whether it was melted down or moulded into a convenient disc, it should be worth exactly the same.

A pound of silver was divided into 240 pennies. There were 12 pennies in a shilling and 20 shillings to a pound (12 x 20 = 240). Each penny was further subdivided into four farthings. We organised our coinage this way for about 1,300 years – until in 1971 someone finally came up with a less mentally-taxing structure. (“The British resisted decimalised currency for a long time,” as Neil Gaiman put it, “because they thought it was ‘too complicated’.”)

All those centuries ago, everything operated on a far more local basis – primarily owing to the time it took to convey messages across long distances. In the case of money, each town would produce its own coinage. There wasn’t one ‘Royal Mint’ as there is today.

The problem with this? It created ample opportunity for any individual ‘moneyer’ (the name for the trade that produced coins) to cheat the system by mixing in much cheaper tin with the silver that should have been used.

In other words, the unwary trader might think they were being given a valuable pound of sterling silver, but find they had nothing of the sort if they ever decided to melt it down.

Moneyers would come to regret giving in to this temptation. When Henry I became king in 1100 and discovered what was going on, he arranged for all the moneyers to be castrated and have their right hand cut off.

Royal flush

Seven Henrys and nearly 400 years later we find Henry VIII on the throne – coming to power in 1509.

Henry VIII wanted more centralised control of the currency. So he shut down all the local mints and decreed that the Royal Mint in London could be the only entity to create new coins.

This removed the opportunity for moneyers to meddle with the silver content of coins. But it introduced the opportunity for monarchs to do exactly the same thing centrally – without the risk of castration.

The effect was what you might expect from giving control to someone with a desire to accumulate as many goods as possible and no fear of retribution. About 30 years after the creation of the Royal Mint, the silver content of coins fell from over 90 per cent to just over one-third. The pound coin, originally named for its weight in silver, now very much wasn’t.

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https://monevator.com/the-rise-and-fall-of-the-gold-standard/