A Study On The Making Of The Modern British Gold Standard

From the late19th century to World War I, the gold standard had been adopted by many capitalist countries, so this period was called the "international gold standard era". What magic did gold standard have to make so many capitalist countries to abandon the previous bimetallism to embrace it? We know the importance of history lies in the continuity of the various social institutions linking with the past and present together. Present and future choices are shaped by the past, and only in the historical discourse of the institutional evolution, can the past be understood. Therefore, in order to answer this question, we have to return to the original country of the gold standard-Britain.Like the other major capitalist countries, Britain’s monetary institution was also bimetallism in pre-modern times, but Gresham’s Law played a negative role. In the Middle Ages, the commerce was not developed, and commodity exchange was still in the primary stage, so the flaws of bimetallism remained not to be seen. In the Tudor period, with the development of domestic trade and the influx of American gold and silver, Gresham’s Law came into play, the ratio between gold and silver starting imbalance, which seriously affected the monetary institution’s development of England.In the late17th century, institutional loophole of bimetallism led to extreme shortage of domestic silver coins, which made England government have to recoinage the coins. Although a lot of coins were cast by the mint, but compared to the continent, the value of silver coins was still low, large amounts of silver being exported to continental Europe. Being responsible for the recoinage, Newton fixed the value of an ounce of gold in3pounds17shillings6pence in1717, which was the first time to establish the link between gold and pound sterling in the history of England. The silver in the circulation gradually reduced, but gold gradually dominated, so England was turning to the gold standard.After the1696recoinage, although the silver no longer got the favor, that’s just the reality by default. The recast of gold coins in1774not only brought England the perfect and full-bodied gold coins, but also, more importantly, made silver coins lose its position as unlimited legal tender currency. The law provided that silver coins should not be more than25pounds in a one-time payment, which signified the supreme position of silver in the Middle Ages was completely broken. Of course, the development of the gold standard in England was not smooth. The bank run crisis in1797forced the government to issue the policy of the suspension of cash payments, which made the gold standard lose the characteristic of being freely convertible between bank notes and gold coins, gold. Banks issuing notes was no longer restricted, so England faced the pressure of inflation and rising price, and the economic situation was not optimistic. In order to step out of the plight of post-war economy, the Earl of Liverpool led the parliament to pass the gold standard act in1816, which became the milestone in the history of currency in England. The act provided that the gold was the only real measure of value and the unlimited legal tender in the payment, and silver coins should not be more than40shillings in a one-time payment. The act pulled the England’s monetary institution completely out of the mire of the Middle Ages, and established the gold standard running for almost100years in England in the form of law, and provided monetary institution’s pattern and framework for England and even entire capitalist world during the19th century.Three characteristics of gold standard, gold coins being freely cast, it being freely convertible between bank notes and gold coins, gold being freely imported and exported, brought England the relative stability of price and exchange rate, and due to the stable currency, the pound sterling was favored by the international market and gradually became many countries’ reserve currency. England enjoyed the advantage of the gold standard and benefited a lot from it, and finally it became the world’s superpower in the middle of the19th century.Institutionally, the gold standard not only followed some features of bimetallism, but also surpassed it. It had created a completely different monetary institution, and combined the human’s original belief on the glittering precious metal with the advantages of gold as the standard currency. Undoubtedly, the gold standard was a model of financial innovation, and represented a huge progress of monetary institution.