David Orrell provides a wonderful history of the gold standard

David Orrell writing at Worldfinance.com provides an extraordinarily erudite and commendably presented history of the gold standard:

In the eyes of merchants and traders around the world, Newton’s ratio slightly favoured gold over silver. Gold coins were therefore sold to buy silver coins, and these were melted and exported. In theory, the market price of gold would fall as it became relatively abundant compared with silver; Newton predicted that any discrepancy would be erased over time. Instead, what happened was that the market price of silver adjusted but remained volatile, and the price of gold stayed the same (perhaps because the attractive, machine-produced gold coins were seen as superior to the shopworn silver currency).

Gold standard

Guineas therefore retained their face value of 21 shillings, even though the unit referred to a weight of silver. Newton had transmuted silver into gold (or is it the other way round?) by accident. Thanks to his intervention, the pound sterling (named for a pound of silver) switched de facto from a bimetallic standard to a gold standard – which made everything much simpler – and remained there, with wartime interruptions, for the next 200 years. In 1821, a new coin – the sovereign – was introduced, containing 95 percent of the gold in a guinea, thus making it worth exactly one pound sterling.

The international gold standard, which Newton inadvertently initiated, was one of the longest-running financial institutions in history. It was successful because, being based on an equation between value and mass like an economic law of gravity, it was global and easily shared, so everyone knew where they stood.

The sense of stability granted by the gold standard was captured by the Austrian writer Stefan Zweig in his autobiography, The World of Yesterday, in which he wrote how “the Austrian crown circulated in bright gold pieces, an assurance of its immutability. Everything had its norm, its definite measure and weight”.

Today, gold and other precious metals play a peripheral role in global finance, and yet our attitudes towards money seem shaped by the gold standard era. The desire for an inflexible standard lives on, for example, in the form of German ordoliberalism, a rule-based approach to economics emphasising things like monetary stability, low inflation and balanced budgets, which has influenced the EU and the European Central Bank.

Finance still lives in a world of alchemy, but the alchemists now toil in banks rather than laboratories. Vitas Vasiliauskas, the head of Lithuania’s central bank, put it in 2016: “We are magic people. Each time we take something and give to the markets – a rabbit out of the hat.” Newton might have agreed.

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