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Silver standard

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The silver standard is a monetary arrangement in which a country's government allows conversion of its currency into fixed amounts of silver and vice versa. The gold standard is a system in which a country's government allows its currency to be freely converted into fixed amounts of gold.

The gold standard is a system in which a country's government allows its currency to be freely converted into fixed amounts of gold.

The decrease in gold exports was considered by some to be a result of changing monetary conditions. The demands for gold during this period were as a speculative vehicle, and for its primary use in the foreign exchange markets financing international trade. The major effect of the increase in gold demand by the public and Treasury was to reduce exports of gold and increase the Greenback price of gold relative to purchasing power.

Towards the end of the 19th century, some silver standard countries began to peg their silver coin units to the gold standards of the United Kingdom or the United States. In , British India pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, while in , the Straits Settlements adopted a gold exchange standard against sterling, fixing the silver Straits dollar at 2s 4d.

When Siam adopted a gold exchange standard in , only China and Hong Kong remained on the silver standard. When adopting the gold standard, many European nations changed the name of their currency, for instance from Daler Sweden and Denmark or Gulden Austria-Hungary to Crown, since the former names were traditionally associated with silver coins and the latter with gold coins.

Governments with insufficient tax revenue suspended convertibility repeatedly in the 19th century. The real test, however, came in the form of World War I , a test which "it failed utterly" according to economist Richard Lipsey. By the end of , the classical gold standard was at its peak but World War I caused many countries to suspend or abandon it.

This meant that the costs of American goods decreased relative to those in Europe. Ultimately, the system could not deal quickly enough with the large balance of payments deficits and surpluses; this was previously attributed to downward wage rigidity brought about by the advent of unionized labor , but is now considered as an inherent fault of the system that arose under the pressures of war and rapid technological change.

In any case, prices had not reached equilibrium by the time of the Great Depression , which served to kill off the system completely. For example, Germany had gone off the gold standard in , and could not effectively return to it because War reparations had cost it much of its gold reserves. During the Occupation of the Ruhr the German central bank Reichsbank issued enormous sums of non-convertible marks to support workers who were on strike against the French occupation and to buy foreign currency for reparations; this led to the German hyperinflation of the early s and the decimation of the German middle class.

The US did not suspend the gold standard during the war. The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of World War I, when Treasury notes replaced the circulation of gold sovereigns and gold half sovereigns. Legally, the gold specie standard was not repealed. The end of the gold standard was successfully effected by the Bank of England through appeals to patriotism urging citizens not to redeem paper money for gold specie.

It was only in , when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended.

The British Gold Standard Act both introduced the gold bullion standard and simultaneously repealed the gold specie standard. The new standard ended the circulation of gold specie coins. The decision was described by Andrew Turnbull as a "historic mistake".

Many other countries followed Britain in returning to the gold standard, this was followed by a period of relative stability but also deflation. In September 19, , speculative attacks on the pound forced Britain to abandon the gold standard. They could now use monetary policy to stimulate the economy.

Australia and New Zealand had already left the standard and Canada quickly followed suit. The interwar partially backed gold standard was inherently unstable, because of the conflict between the expansion of liabilities to foreign central banks and the resulting deterioration in the Bank of England's reserve ratio. France was then attempting to make Paris a world class financial center, and it received large gold flows as well.

In May a run on Austria's largest commercial bank caused it to fail. The run spread to Germany, where the central bank also collapsed. International financial assistance was too late and in July Germany adopted exchange controls, followed by Austria in October.

The Austrian and German experiences, as well as British budgetary and political difficulties, were among the factors that destroyed confidence in sterling, which occurred in mid-July Runs ensued and the Bank of England lost much of its reserves.

Some economic historians, such as Barry Eichengreen , blame the gold standard of the s for prolonging the economic depression which started in and lasted for about a decade. Once off the gold standard, it became free to engage in such money creation. The gold standard limited the flexibility of the central banks' monetary policy by limiting their ability to expand the money supply. Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.

Commercial banks converted Federal Reserve Notes to gold in , reducing its gold reserves and forcing a corresponding reduction in the amount of currency in circulation. This speculative attack created a panic in the U. Fearing imminent devaluation many depositors withdrew funds from U. This transfer contracted the US money supply. The foreign loans became questionable once Britain , Germany, Austria and other European countries went off the gold standard in and weakened confidence in the dollar.

The forced contraction of the money supply resulted in deflation. Even as nominal interest rates dropped, deflation-adjusted real interest rates remained high, rewarding those who held onto money instead of spending it, further slowing the economy. In the early s, the Federal Reserve defended the dollar by raising interest rates, trying to increase the demand for dollars.

This helped attract international investors who bought foreign assets with gold. Congress passed the Gold Reserve Act on 30 January ; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.

In return the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar. Other factors in the prolongation of the Great Depression include trade wars and the reduction in international trade caused by barriers such as Smoot—Hawley Tariff in the US and the Imperial Preference policies of Great Britain, [43] the failure of central banks to act responsibly, [44] government policies designed to prevent wages from falling, such as the Davis—Bacon Act of , during the deflationary period resulting in production costs dropping slower than sales prices, thereby injuring business profits [45] and increases in taxes to reduce budget deficits and to support new programs such as Social Security.

The Austrian School asserted that the Great Depression was the result of a credit bust. This act "tore asunder" any remaining confidence in the banking system.

These classes went into debt, producing the credit explosion of the s. Eventually the debt load grew too heavy, resulting in the massive defaults and financial panics of the s. Under the Bretton Woods international monetary agreement of , the gold standard was kept without domestic convertibility. Many countries kept reserves in gold and settled accounts in gold. Still they preferred to settle balances with other currencies, with the American dollar becoming the favorite.

The International Monetary Fund was established to help with the exchange process and assist nations in maintaining fixed rates. Within Bretton Woods adjustment was cushioned through credits that helped countries avoid deflation. Under the old standard, a country with an overvalued currency would lose gold and experience deflation until the currency was again valued correctly. Most countries defined their currencies in terms of dollars, but some countries imposed trading restrictions to protect reserves and exchange rates.

Therefore, most countries' currencies were still basically inconvertible. In the late s, the exchange restrictions were dropped and gold became an important element in international financial settlements. After the Second World War , a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements.

Under this system, many countries fixed their exchange rates relative to the U. All currencies pegged to the dollar thereby had a fixed value in terms of gold. Starting in the — administration of President Charles de Gaulle and continuing until , France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing US economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.

President Richard Nixon to end international convertibility of the U. This was meant to be a temporary measure, with the gold price of the dollar and the official rate of exchanges remaining constant. Revaluing currencies was the main purpose of this plan. No official revaluation or redemption occurred. The dollar subsequently floated. In December , the " Smithsonian Agreement " was reached.

Other countries' currencies appreciated. However, gold convertibility did not resume. Once again, the devaluation was insufficient. Within two weeks of the second devaluation the dollar was left to float. In October , the government officially changed the definition of the dollar; references to gold were removed from statutes.

From this point, the international monetary system was made of pure fiat money. An estimated total of , tonnes of gold have been mined in human history, according to GFMS as of This is roughly equivalent to 5.

There are varying estimates of the total volume of gold mined. One reason for the variance is that gold has been mined for thousands of years. Another reason is that some nations are not particularly open about how much gold is being mined. In addition, it is difficult to account for the gold output in illegal mining activities.

World production for was circa 2, tonnes. Since the s, annual gold output growth has approximately kept pace with world population growth i. Commodity money is inconvenient to store and transport in large amounts.

Furthermore, it does not allow a government to manipulate the flow of commerce with the same ease that a fiat currency does.

As such, commodity money gave way to representative money and gold and other specie were retained as its backing. Gold was a preferred form of money due to its rarity, durability, divisibility, fungibility and ease of identification, [56] often in conjunction with silver. Silver was typically the main circulating medium, with gold as the monetary reserve.

Commodity money was anonymous, as identifying marks can be removed. Commodity money retains its value despite what may happen to the monetary authority. After the fall of South Vietnam , many refugees carried their wealth to the West in gold after the national currency became worthless. Under commodity standards currency itself has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie.

A US silver certificate , for example, could be redeemed for an actual piece of silver. Representative money and the gold standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. Commodity money conversely led to deflation and bank runs.

Countries that left the gold standard earlier than other countries recovered from the Great Depression sooner. For example, Great Britain and the Scandinavian countries, which left the gold standard in , recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost entirely avoided the depression due to the fact it was then barely integrated into the global economy.

The connection between leaving the gold standard and the severity and duration of the depression was consistent for dozens of countries, including developing countries. This may explain why the experience and length of the depression differed between national economies. It is sometimes referred to as the gold specie standard to more easily distinguish it.

Opponents of a full standard consider it difficult to implement, saying that the quantity of gold in the world is too small to sustain worldwide economic activity at or near current gold prices; implementation would entail a many-fold increase in the price of gold.

In an international gold-standard system which is necessarily based on an internal gold standard in the countries concerned , [60] gold or a currency that is convertible into gold at a fixed price is used to make international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold, inflows or outflows occur until rates return to the official level.

International gold standards often limit which entities have the right to redeem currency for gold. A return to the gold standard was considered by the US Gold Commission back in , but found only minority support. Mahathir claimed it would be a stable unit of account and a political symbol of unity between Islamic nations.

This would purportedly reduce dependence on the US dollar and establish a non-debt-backed currency in accord with Sharia law that prohibited the charging of interest. Federal Reserve Chairman, Alan Greenspan acknowledged he was one of "a small minority" within the central bank that had some positive view on the gold standard. Similarly, economists like Robert Barro argued that whilst some form of "monetary constitution" is essential for stable, depoliticized monetary policy, the form this constitution takes—for example, a gold standard, some other commodity-based standard, or a fiat currency with fixed rules for determining the quantity of money—is considerably less important.

The gold standard is supported by many followers of the Austrian School of Economics , free-market libertarians and some supply-siders. In the United States, strict constitutionalists object to the government issuing fiat currency through central banks. Some gold-standard advocates also call for a mandated end to fractional-reserve banking. Many similar alternatives have been suggested, including energy-based currencies, collections of currencies or commodities, with gold as one component.

Former congressman Ron Paul is a long-term, high-profile advocate of a gold standard, but has also expressed support for using a standard based on a basket of commodities that better reflects the state of the economy.

In the Utah legislature passed a bill to accept federally issued gold and silver coins as legal tender to pay taxes. Similar legislation is under consideration in other US states. In , the Arizona Legislature passed SB , which would have made gold and silver coin a legal tender in payment of debt, but the bill was vetoed by the Governor. Economic historians did not agree with candidate's assertions that the gold standard would benefit the US economy. In a poll of 40 U.

The specific statement with which the economists were asked to agree or disagree was as follows: The economist Allan H. Meltzer of Carnegie Mellon University presented arguments against Ron Paul 's advocacy of the gold standard from the s onward. From Wikipedia, the free encyclopedia.

The examples and perspective in this article may not represent a worldwide view of the subject. You may improve this article , discuss the issue on the talk page , or create a new article , as appropriate. June Learn how and when to remove this template message. For other uses, see Gold standard disambiguation. This section needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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All references to "dollars" in this section refer to the United States dollar , unless otherwise stated. March Learn how and when to remove this template message. October Learn how and when to remove this template message.

May Learn how and when to remove this template message. This was the first time bulk silver in tael Chinese: Silver ingots had a shape similar to a boat or a Chinese shoe during the Yuan dynasty — This became an ordinary shape for silver ingots during the following centuries.

The use of silver as money was very established at the time of the Ming dynasty — Paper money was first issued in by the founder Hongwu Emperor amid the ban of silver as medium of exchange. But due to the increasing depreciation, the paper money became basically worthless and the ban on silver usage was finally lifted in 1st year of the Zhengtong Emperor. Meanwhile, silver was made much available through foreign trade with the Portuguese and the Spanish, beginning in the 16th century.

The great tax reform by the statesman Zhang Juzheng in 9th year of the Wanli Emperor simplified the taxation and required all the tax and corvee to be paid in silver. This can be seen as an indication of the firm position of silver in the monetary system of the Ming. However the reform would not have been a success or even feasible if the enormous amounts of silver had not been available through trade and imports from the Americas, mainly through the Spanish.

During the Qing dynasty — , silver ingots were still used, but various foreign silver dollars had become popular in the Southern coastal region through foreign trade since the mid-Qing era. However, the Qing dynasty very much resisted the idea of minting a silver coin of their own. It was not until late Qing, in , that the first circulating silver coin was introduced by Guangdong province. The coin was at par with the Mexican peso , and soon this issue was emulated by other provinces. For these silver coins, the tael was still seen as the proper monetary unit, as the denomination of the coins were given as 0.

Note for the treaties signed between the Qing dynasty and the foreign powers the indemnities were all in tael of silver, except for the Treaty of Nanking , where the silver dollar was indicated. It was not until that the " yuan " Chinese: The yuan was subdivided into 10 jiao or fen, and specified as 0. The next year, , the so-called "Great Qing Silver Coin" one yuan dollar was issued, but soon after the dynasty was replaced by the Republic.

The silver standard was again adopted and codified in by the newly established republic, with one yuan still being equal to 0. After the Chinese Nationalist Party Kuomintang unified the country in , the yuan was again announced as the standard unit in , but this time the relationship of the yuan to the tael was abolished, as one yuan was now equal to In the same year, , while most of the Western countries especially Britain and USA had left the gold standard because of the Great Depression , it was said that China almost avoided the depression entirely, mainly due to having stuck to the silver standard.

China would be the last to abandon the silver standard, along with the British crown colony of Hong Kong. Germany's abandonment of the silver standard put further pressure on other countries to move to the gold standard. The first metal used as a currency was silver, more than 4, years ago, when silver ingots were used in trade. During the heyday of the Athenian empire , the city's silver tetradrachm was the first coin to achieve "international standard" status in Mediterranean trade.

The British colony of Hong Kong would be the last, along with China , to abandon the silver standard in September Hong Kong then adopted the gold exchange standard and the Hong Kong dollar took on the exact value of one shilling and three pence 1s 3d sterling. From , the value of silver depreciated relative to gold, due to the drop in demand for silver in the mints of Europe and North America, as those countries changed over to the gold standard.

This had severe consequences for the rupee and it resulted in the fall of the Rupee. Following the Fowler report , India adopted the gold exchange standard in the year , fixing the value of the rupee at exactly one shilling and four pence 1s 4d sterling. The dirham was a silver coin originally minted by the Persians.

Silver remained the most common monetary metal used in ordinary transactions until the 20th century. Rich deposits of silver in the Spanish colonies of the New World allowed Spain to mint great quantities of silver coins.

The Spanish dollar was a Spanish coin, the "real de a ocho" and later peso , worth eight reals hence the nickname "pieces of eight" , which was widely circulated during the 18th century. By the American Revolution in , Spanish dollars backed paper money authorized by the individual colonies and the Continental Congress. Great Britain's early use of the silver standard is still reflected in the name of its currency, the pound sterling , which traces its origins to the early Middle Ages see Anglo-Saxon pound , when King Offa of Mercia introduced the silver penny , which copied the denarius of Charlemagne 's Frankish Empire.

The early silver pennies were struck from fine silver as pure as was available. English currency was almost exclusively silver until , when the gold noble was put into circulation. However, silver remained the legal basis for sterling until In , a new gold coinage was introduced based on the 22 carat fine guinea.

However, this valuation overvalued gold relative to silver compared to other European countries. British merchants sent silver abroad in payments while exports were paid for with gold. As a consequence, silver flowed out of the country and gold flowed in, leading to a situation where Great Britain was effectively on a gold standard.

The economic power of Great Britain was such that its adoption of a gold standard put pressure on other countries to follow suit.

The United States adopted a silver standard based on the Spanish milled dollar in This was codified in the Mint and Coinage Act , and by the federal government 's use of the Bank of the United States to hold its reserves, as well as establishing a fixed ratio of gold to the US dollar. This was, in effect, a derivative silver standard, since the bank was not required to keep silver to back all of its currency. This began a long series of attempts for America to create a bimetallic standard for the US dollar , which would continue until the s.

Gold and silver coins were legal tender, including the Spanish real. Because of the huge debt taken on by the US federal government to finance the Revolutionary War , silver coins struck by the government left circulation, and in President Jefferson suspended the minting of silver coins.

The US Treasury was put on a strict hard money standard, doing business only in gold or silver coin as part of the Independent Treasury Act of , which legally separated the accounts of the federal government from the banking system. However the fixed rate of gold to silver overvalued silver in relation to the demand for gold to trade or borrow from England.

Following Gresham's law , silver poured into the US, which traded with other silver nations, and gold moved out. In the US reduced the silver weight of coins, to keep them in circulation, and in removed legal tender status from foreign coinage.

In , the final crisis of the free banking era of international finance began, as American banks suspended payment in silver, rippling through the very young international financial system of central banks. In the US government suspended payment in gold and silver, effectively ending the attempts to form a silver standard basis for the dollar. Through the — period, various attempts to resurrect bi-metallic standards were made, including one based on the gold and silver franc ; however, with the rapid influx of silver from new deposits, the expectation of scarcity of silver ended.

This announcement was part of the economic measures now known as the " Nixon Shock ".

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In October , the government officially changed the definition of the dollar; references to gold were removed from statutes.

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