Gold Standard

Gold Standard
Gold Standard

Control of the money supply has been a key component of every regime in history, and when looking for a conspiracy, most theorists “follow the money”—in this case, the government’s relationship to gold. Roman emperors were notorious for shaving gold coins so that they would look normal but actually contain slightly less gold, thereby allowing the rulers to inflate even a gold-based currency.

Generally, however, by the Middle Ages most monarchs were constrained by the ease of weighing and measuring gold, and therefore found it difficult to meddle with the state’s money supply. Instead, they borrowed against both gold reserves and taxes.

Throughout this period, silver was desired for coinage, but its value was almost always measured against gold. Since silver was mined at an approximate stable ratio to gold (somewhere in the range of 13–17 ounces of silver taken out of the ground for every ounce of gold), the relative value of silver to gold remained fairly constant over the centuries.


Perhaps surprisingly, the large discoveries of gold and silver in the New World—mostly in Spanish-held territory—did not significantly alter the European economy. Prices did begin a gradual creep upward in about 1200, and increased sharply at times, correlating roughly with the “commercial revolution,” then again with the birth of capitalism in the late 1700s.

Of course, other events unrelated to gold or silver production also caused prices to skyrocket, as with the grain shortages in France in the 1780s. The important point, though, is that gold remained the polestar by which virtually all other values in the European world were fixed, and thus it obtained a certain mythic character.

Gold proved the world’s most useful and reliable money in the premodern world because it possessed several important characteristics of money:
  1. it was easily divisible, 
  2. it was (somewhat) portable, 
  3. it had inherent jewelry value, 
  4. it was scarce, and 
  5. it was durable.
Gold’s scarcity, however, became increasingly unattractive as a characteristic of money in the developing European economy and in the United States, where capitalism demanded constant exchange, financing, and, above all, a steadily growing circulating medium.

By 1800, mining and minting of gold coin in no way could keep pace with the demands of the capitalist system. Nor could silver adequately fill in: what capitalism demanded was an order-of-magnitude increase in the money supply, not the minor incremental surge provided by minting silver.

The Bank of England, the world’s first “central bank,” was the first to break from the “mercantilist” notion that only gold and silver constituted wealth. The Bank operated on a gold reserve upon which it issued banknotes that were redeemable in gold.

What note holders and depositors did not know (and were not told) was that if all those holding notes suddenly and simultaneously appeared at the bank to redeem their paper money in gold (and later, silver coin), there would not be nearly enough metal in all of England to redeem every note at 100 percent (“par”) value.

A banking term, “fractional reserve banking,” was used to describe the concept, which relied on a statistical probability (or, at the time in the 1700s, a likelihood based on common sense) that only a fraction of the note holders would ever appear at any given time to redeem their paper money in gold or silver “specie” (coin).

US gold certificate
US gold certificate

To a conspiracy theorist, this had all the indications of a plot. It appeared that the Bank of England, with the support (or at the direction) of the king, was deliberately cheating the public by issuing notes that it could not redeem in an emergency.

In fact, “fractional reserve banking” involved a trade-off in which the public agreed to accept paper money for its convenience in exchange for a small amount of risk. What went unstated was the degree of risk, or under what conditions the money would not be redeemable.

Scottish “free” banks approached the matter differently. They did not attempt to mandate any specific reserve ratio, but rather allowed competition to sort out the good from the bad banks. However, if a bank failed, its president and directors were subject to double liability for the loss.

Lawrence White has argued convincingly that the Scottish system proved extremely stable and resilient, especially in contrast to the Bank of England. Competitive money, rather than gold convertibility of a national currency, White maintained, was the key to a stable monetary system.

In the United States, state legislatures attempted to bridge the gap between the two systems. States adopted a system of chartered banks whose charters authorized them to issue paper notes, backed by specie. The banks had to maintain convertibility at all times.

This did not prove difficult in normal economic circumstances, but during panics, almost every bank in the state—or even the nation—could “suspend” specie payments and simply refuse to convert paper money for gold or silver.

According to the bank charters, the legislature was to terminate the bank’s authority to do business, but in fact, since suspension was nearly universal, and termination would effectively shut down all banks, legislatures rarely invoked these clauses. Instead, banks resumed business—and payment of specie—as soon as economic conditions warranted.

Still, a healthy competition among banknotes let people know which institution’s notes were reliable, and which were not. A “Dun and Bradstreet” catalogue of banknotes, called Dillistin’s Bank Note Reporter, was published and widely circulated among bankers and merchants.

It accurately and in a timely fashion alerted storekeepers to money that had lost its value on the open market. Still, to operate as a bank, until the 1830s and the appearance of “free banking” laws, an institution required a charter from the state legislature in order to issue notes.

It was note issue that differentiated chartered banks from “private” banks—deposit and lending operations. But the burden of chartering numerous new banks in the booming 1840s proved great enough that many states adopted “free banking” laws, further severing the relationship between the paper money and gold.

Under the “free banking” laws, all a bank had to do to issue notes was to place an appropriate amount of designated bonds on deposit with the secretary of state. After minor problems with the wording of the laws were ironed out in Michigan and other states, free banking proved effective and reliable.

Indeed, in the U.S. antebellum period, competitive note issue, backed by a gold reserve, more than adequately served the economy’s needs. When competition was enhanced by a branch banking system (which many states allowed), the system became even stronger and more reliable.

Wedged into this mix were the First and Second Banks of the United States (BUS, 1791–1811, and 1816–1836, respectively). These were national banks that were four-fifths privately owned, and could issue notes that had a universal quality in that the Banks were the only institutions permitted to have interstate branches.

Because of their ubiquity and national character, they were viewed by critics as inordinately powerful and “controlled” by foreign interests. However, they were still both tied to the gold standard.

Of equal concern to the conspiracy-minded was a suspicious change of the Constitution’s Article I, Section 8, which states, “The Congress shall have Power ... To coin Money, regulate the Value thereof, and of foreign Coin ...”

According to the “gold bugs,” or early “hard money” advocates, this section stipulated that the phrase “coin Money” meant only metallic money could constitute the circulating medium of the United States. The Jacksonian Democrats, especially, interpreted the phrase this way and demanded an end to all noteissue by private banks.

Led by Thomas Hart “Old Bullion” Benton, the “hard money” wing of the Democratic Party wanted to stop all banks from printing paper money, threatening to cease chartering any banks at all if they could not ensure it in other ways.

The United States, like England, had never “gone off” the gold standard, in that all international transactions were delineated in gold and currencies of all types were still redeemable in gold. Moreover, from time to time, such as Andrew Jackson’s “Specie Circular,” payments on government land were required to be made in gold. When the value of silver or gold changed, the U.S. Congress or Parliament passed a law reestablishing the value of silver to gold, not vice versa.

The Civil War brought new pressures on the gold standard. Abraham Lincoln’s Union government needed additional revenue to finance the war, and temporarily suspended all gold redemption, then authorized the printing of $450 million in “greenbacks.” These notes differed from previous money in that they were not immediately redeemable in gold, but rather had a promise to pay in gold at a future date.

In addition to the greenbacks, the Union chartered a wave of national banks, which had the authority to print money, and, in order to remove competition from the national banks, the government passed a 10 percent tax on all nonnational banknotes, effectively eliminating all competition with government money. Thus, in a period of three years, the link to gold was temporarily severed and competition in note issue ended.

Following the Civil War, the United States felt the effects of an international deflation. Due to the idiosyncrasies of the national banking system, this deflation hit the South and the West harder than other sections of the country, and there was an acute shortage of money in the West, especially. At the same time, new silver discoveries (the Comstock Lode, for example) had boosted the amount of silver coming out of the ground relative to gold.

Instead of a ratio of 16 ounces of silver to one ounce of gold, by the 1870s the ratio reached 17:1. Politicians and agrarian activists saw an opportunity to use the power of government to rearrange the rules in their favor. They lobbied for the “free and unlimited coinage of silver at 16:1,” hoping to force the taxpayers to pay the additional costs for turning the cheaper silver into coins.

Two half-measures were adopted under silverite pressure: the Bland-Allison Act of 1878 and the Sherman Silver Purchase Act. Both bills attempted to force the government to purchase large quantities of silver at artificially inflated prices, but each failed to achieve its objective. Neither could purchase nearly enough silver to affect the market, and neither artificially fixed prices at a significantly higher level.

The Sherman Act proved disastrous. It required the government to purchase silver at the price of 33:2, thus opening a window for speculators without increasing the quantity of silver in circulation. Domestic and foreign speculators pounced on the price differential to pour silver into U.S. vaults, while gold flowed out. The government came close to bankruptcy before banker J. P. Morgan bailed out the United States Treasury with a massive loan.

This only further inflamed the anger of those convinced that industrialists and bankers such as Morgan, Andrew Carnegie, and John D. Rockefeller controlled the money supply. Somehow, the critics argued, Morgan, Rockefeller, and the “money trust” manipulated the economy by its “control” of the gold standard.

This view, of course, flipped the old Jacksonian and English “goldsmith” views on their heads: they had argued that only through a gold standard could the “common man” be protected against the machinations of “big business” and the “money interests.”

Within a fifty-year period, however, conspiracy theorists—many of them the same voices who had called for a gold-only standard—now lobbied for a bimetallic standard. Businessmen and bankers favored a gold standard, not because they controlled it, but because it was predictable and stable.

The “free silver” movement reached its apex with the nomination of William Jennings Bryan as the Democratic candidate for president in 1896. Echoing the conspiracy-theorists’ fears of a “money trust,” Bryan delivered his famous “Cross of Gold” nomination acceptance speech in which he warned that shadowy forces were attempting to “crucify mankind” on a “cross of gold.” The Republican, William McKinley, ran on a gold-only standard (as well as a “full dinner pail”), and won handily, ending all discussion of bimetallism.

In 1913, the Federal Reserve System was created as the new “central” bank of the United States, and it further centralized monetary authority in the hands of the federal government. As one historian of U.S. central banking, Richard Timberlake, has pointed out, there was never any question that the Federal Reserve would operate under the existing gold standard. However, the deflationary shocks of the 1920s caused most countries, culminating with England, to go off the gold standard for international exchanges.

That left the United States as the only major nation still on the gold standard, meaning that people could purchase paper dollars with paper pounds sterling or francs, then convert dollars to gold. U.S. gold flowed out of the Federal Reserve’s vaults to Europe, weakening the banking system, until Franklin Roosevelt took the United States off gold during the New Deal.

Conspiracy theorists then came full circle again: Roosevelt was attempting to control the money supply of the United States by eliminating the gold reserve requirement—precisely what the previous generation of conspiracy theorists had advocated.

By that time, conspiracy theories had split into two streams when it came to gold and money. One stream argued that the Rockefellers, through the Bank of England (and with the support of the Rothschilds), manipulated the international price of gold.

The other stream claimed that, in line with the objective of a “one-world government,” the Federal Reserve served as a tool for the Council on Foreign Relations, the Trilateral Commission, and the United Nations to weaken the U.S. economy and provide convenient inflation for politicians favored by these groups. Critics such as J. Orlin Grabbe and Sherman Skolnick have argued that the Federal Reserve has, at political direction, inflated and deflated the monetary base at critical times.

As the Internet has made electronic money transfers easier, the significance of gold-backing of any monetary system has faded. Gold prices, except for a pair of spikes related to oil price increases in the 1970s, have hovered at post–World War II lows. Despite claims by Grabbe and Skolnick, no Federal Reserve inflationary “mischief” has resulted in any substantial gold price increases.

Quite the contrary, during the time that individuals or foreign interests were supposedly masterminding a massive inflation, gold prices continued to languish at low levels. Indeed, to simultaneously manipulate both Federal Reserve policies for inflation and gold prices is self-contradictory. If gold is the “ultimate guarantor” of monetary value, then economic logic suggests that gold prices would have risen in the case of inflation.

More likely, the Internet has opened up a new era of genuinely competitive money, although not privately issued money. Instead, national currencies—the yen, the ruble, the dollar, the peso, and the euro—all compete against each other with productivity and national wealth providing the real guarantor of monetary values.