The Classic Gold Standard in the United States, 1879-1917 David Mitchell Economics 425 The gold standard is mostly associated today with hardline conservatives and libertarians calling for the currency to be backed or redeemable in gold in the United States. However, before this the gold standard was the monetary system adhered to by by most of the world. It has existed in different forms in United States history. There was the classic gold standard before World War I, the interwar gold standard , and again with the Bretton Woods System. This paper will focus focus on the international gold standard standard or “classic” gold standard that was the monetar y system in the United States from the
resumption of specie payments in 1879 until the United States entered World War I and was forced off the gold standard in 1917. The United States adhering to the gold standard does not mean that only gold was used as money. It adhered to a mixed gold standard in where both specie and paper is used as currency. A domestic mixed gold standard has several important qualities. The gold content of the dollar is fixed and well defined. 1 The dollar price of gold was fixed at $100 in paper currency per $100 in gold coin, and the dollars gold content was set at 23.22 fine grains per $1.2 Another quality is that gold must be allowed to circulate freely and have legal-tender status for any and all possible payments. Also, gold must be must convertible into gold coin at the government mint at the mint price. The United States 1 2
Officer, “Gold Standard.”
The mint price of gold in the United States was $20.6718 per troy ounce. Where 1 t oz
is equal to 480 grains. Therefore $1 was equal to to 23.22 grains.
oz, which is equal
Treasury fixed the mint price of a troy ounce of gold at $20.6718 during this period.3 Lastly, individuals are not barred from melting down gold coins into bullion, and can do as they please with gold as long as they were not privately coining money.4 These qualities are needed for a country to adhere to the gold standard, but the United States during this period also adhered to the international gold standard. The international gold standard required that multiple countries adhere to a gold standard, and that the trading of gold be completely unrestricted. That enabled gold to flow freely between countries to adjust their balance of payments. Unlike most gold transactions today where gold is often just transferred from one vault to another, gold would literally be shipped from one country to another. Each country adhering to the international standard would fix their mint prices, and these mint prices created fixed rates of exchange between countries. The central bank of Great Britain, The Bank of England, fixed a troy ounce of gold at £4.247727.5 Given the fixed price of gold in United States at $20.6718 per troy ounce, one can find the exchange rate of dollars to per pound sterling:
$4.8665 . This is the mint-parity exchange rate.
The market exchange rate going below or above would not trigger the import and export of gold, respectively, alone. Other costs have to be taken into account for the importing or exporting of gold. These include shipping costs, insurance, and forgone interest, and also the cost of coin abrasion. The aforementioned costs were reported to be
This was made official in 1900. This is start of when the United States truly was a on gold standard. Silber, When Washington Shut Down Wall Street , 28. 4 5
Officer, “Gold Standard.”
Silber, When Washington Shut Down Wall Street , 28.
$0.0028 per ounce and $0.0007 per ounce respectively.6 The point, at which the market exchange rate exceeds the mint parity price plus the cost of exporting gold, is called the gold export point. When this occurred there was a chance for a riskless gain or arbitrage, and individuals in the private sector will export gold and obtain sterling in return. These arbitrageurs would continue to exploit this opportunity for riskless profit by continuing to export gold for sterling until the market price had fallen below the gold export point again. The gold import point would be the mint price minus the added costs. Similar to the mechanism that prevents the market price from extending to far above the gold export point, arbitrageurs import gold and sale for their foreign currency until the market price has risen above the gold import point. The spread between the gold export point and import point is where the exchange rate would mainly fluctuate. This is because central banks would raise the discount rate when the market exchange rate approached the gold export point to halt the outflow of gold. Contrarily, they would lower the discount rate to discourage the inflow of gold when the market price approached the gold import point. This was not the case for the United States though. It had no central bank and had a decentralized banking system, and thus it did not adjust as efficiently as other countries.7 The United States’ experience on the classical gold standard has two distinct periods with contrasting characteristics. The first period consist of the years between 1879 and 1896, and the second period is 1896 – 1914. The most obvious characteristic of the first period was constant deflation. Statistical evidence of a structural break in regards to the price level and has been found for Germany, France, Great Britain, and the United
Ibid., 30, 34. Officer, “Gold Standard.”
States after 1896.8 What would cause worldwide deflation before 1896? There were many factors that contributed to this. Many countries adopted the gold standard in the years between the 1870’s and 1890’s. This greatly increased the demand for gold and
thus put downward pressure the price level. Also, gold production was noticeably low during this period. Worldwide gold production averaged 6.1 million fine ounces which, when given the generally accepted stock of world gold in 1880 of 284 million fine ounces, only increases the stock by about 2.15%.9 Clearly not all of this gold production was for monetary reasons, and as such, the growth in the monetary gold stock would have been lower than 2%. The next period, lasting from 1897-1914, was a totally different experience for the United States. This period was not marked by deflation, with the exception of financial panics such as the Panic of 1907. Not only did the price level begin to rise during this period, but also the growth in output and the money stock turned noticeably more vigorous.10 The major contributing factor to this change was large-scale discoveries of low-grade gold ore deposits in South Africa and Alaska. The development of the cyanide process allowed gold to be extracted from low-grade ore like that from South Africa, and thus the world’s stock of gold greatly increased. The world’s gold stock, including
nonmonetary and monetary use, increased twofold between the years 1897-1914.11 With such a large increase in the amount of gold available, much of it made its way into the 8
This was done performing a chi-square test of a structural break. The mean inflation rate for all four countries was negative before 1896 and positive after 1896. Bordo, LandonLane, and Redish, “Deflation, Productivity Shocks and Gold: Evidence from the 18801914 Period,” 519– 520. 9
Friedman and Schwartz, A Monetary History of the United States, 1867-1960, 137.
monetary base of the countries adhering to the gold standard. This could lead to no other consequence other than inflation. It is estimated that the price level rose by over 40% between 1897-1914 in the United States.12 The deflation experienced in the United States during the years between 18791897, really deflation started in earnest around 1868, caused for many debtors and farmers in the United States to call for the adoption of a bimetallic standard. Under this form of monetary system the Treasury would fix the dollar to certain weight in both gold and silver. For example, the United States had set the weight of the dollar in silver at 371.25 fine grains and in gold at 23.22 for a ratio of 15.988 to 1 or effectively 16 to 1. “16 to 1” was a rallying cry of William Jennings Bryan in the election of 18 96. He
represented those hoping the adoption of the bimetallic standard would cause the constant deflation to end. When the market price of silver dropped after discoveries in the late 1870’s, a formerly looked over addition to the Resumption Act of 1873 came to be viewed as the “Crime of 1873”. Silver was no longer going to be coined by the Treasury,
effectively choking the money supply to only gold, and taking easily obtainable dollars from those owning silver.13 After the defeat of Bryan in 1896 by William McKinley, the coining of silver became a non-issue. This is not because of some masterful work of McKinley, but simply that great increase in the world’s gold stock brought the price inflation those advocating for silver wanted all along. This is just but an overview of the many interesting aspects of the classical gold standard. It stands as a marvel of economic and world history. The great cooperation
They could still sell it open the market but it was worth less than 371.25 grains of fine silver would now fetch less than $1 on the open market.
needed for a system to run as smoothly as this monetary system did is amazing. This cooperation was not seen after World War I, and may never be seen again.
Bordo, Michael D., John Landon-Lane, and Angela Redish. “Deflation, Productivity Shocks and Gold: Evidence from the 1880-1914 Period.” Open Economies Review 21, no. 4 (September 2010): 515 – 46.
Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 18671960. National Bureau of Economic Research. Studies in Business Cycles 12.
Princeton, New Jersey: Princeton University Press, 1993. Officer, Lawrence H. “Gold Standard.” EH.net Encyclopedia, March 26, 2008.
http://eh.net/encyclopedia/gold-standard/. Silber, William L. When Washington Shut down Wall Street : The Great Finan cial Crisis of 1914 and the Origins of America’s Monetary Supremacy. Princeton, New Jersey: Princeton : Princeton University Press, c2007., 2007.