Introduction

The last quarter of the nineteenth century saw the spread of an international monetary system based on gold, linking the major countries of the world with fixed international exchange rates for their domestic currencies, a system more stable perhaps than anything seen since. The system evolved; it presented many institutional contrasts; yet all monetary authorities had a common policy aim – the preservation of specie payments or of convertibility of their currencies, to which all other aims were subordinated. Why the gold standard worked successfully in the sense of eliminating balance of payments imbalances without exchange rate changes in a rapidly changing world economy has proved a challenging question for economists and economic historians. Myths, indeed, have grown up about gold and its discipline before 1914 such that in later years they have at times dominated and even perverted international economic policies. Even now gold refuses to lie down and accept its role as a barbarous relic. Besides describing and analysing the institutional and structural arrangements underlying the gilt facade, this chapter will seek to explain why and how the gold standard worked, especially for Britain, and will emphasize the importance of the particular and peculiar economic relationships of this period in providing a favourable environment within which the gold standard could flourish.

Basic gold standard elements

By the middle of the nineteenth century most countries had sought to define their domestic currencies in terms of a metallic base of silver or gold, with silver or gold coins of the appropriate weight as the basic money substance.