The man who accidentally put Britain on the gold standard was Isaac Newton. In 1717, as Master of the Royal Mint — a job he took seriously, personally pursuing counterfeiters to the gallows — Newton fixed the official exchange rate between gold guineas and silver shillings. He set gold slightly too high, silver slightly too low. Following the logic of markets, silver coins steadily drained abroad where they bought more, and Britain drifted onto a de facto gold standard decades before anyone chose one. Parliament made it official in the early nineteenth century, with gold formally the sole standard from 1821.
The idea at the core was seductively simple: paper money should be a receipt. A banknote was a promise that the bank would hand over a fixed weight of gold on demand. Fix every currency to gold and you fix them all to each other — a pound was worth about 4.86 American dollars not by negotiation but by arithmetic, since each was defined as a set amount of the same metal. In the late nineteenth century, this became the operating system of the world economy. Germany adopted gold after 1871; the United States, after furious political battles, entrenched it; and by the 1900s most major trading nations had joined. The classical gold standard era, roughly the 1870s to 1914, saw an extraordinary boom in global trade and investment, with London as its clearing house.
The cross of gold
Not everyone loved it. Because the money supply was tethered to the amount of gold, prices could grind downward for years when gold was scarce — and deflation crushes debtors, whose debts stay fixed while their incomes fall. In 1890s America this fury became a mass movement of indebted farmers demanding that silver be coined alongside gold to expand the money supply. It gave American politics one of its most famous speeches: at the 1896 Democratic convention, William Jennings Bryan thundered, "You shall not crucify mankind upon a cross of gold." He electrified the hall, won the nomination — and lost the election. The Gold Standard Act of 1900 settled the question in gold's favour.
Then the system met the twentieth century. The First World War blew it apart: belligerents suspended gold convertibility and printed money to fight. Afterwards, restoring the gold standard became a moral crusade of respectable finance. In 1925, Winston Churchill, as Chancellor of the Exchequer, returned Britain to gold at the old pre-war parity — a rate that badly overvalued the pound and forced brutal wage and price deflation. The economist John Maynard Keynes attacked the decision in a pamphlet pointedly titled The Economic Consequences of Mr Churchill, and Churchill himself later regarded it as one of the great mistakes of his career.
Golden fetters
The Great Depression turned the gold standard from an anchor into a millstone. Defending gold parities forced central banks to keep money tight precisely when collapsing economies needed the opposite. Economic historians, notably Barry Eichengreen, later called these constraints "golden fetters" — and found a striking pattern: the sooner a country abandoned gold, the sooner its recovery began. Britain went off gold in 1931. The United States followed under Franklin Roosevelt, who in 1933 ordered Americans to turn in most of their monetary gold — Executive Order 6102 — and then in 1934 revalued gold from 20.67 dollars an ounce to 35, devaluing the dollar at a stroke. The vast hoard the US accumulated soon needed a home: the Fort Knox bullion depository opened in 1937.
After the Second World War, the world tried a compromise. At the Bretton Woods conference of 1944, delegates from 44 nations agreed that other currencies would peg to the US dollar, and the dollar alone would remain convertible into gold at 35 dollars an ounce — for foreign governments, not citizens. For a quarter-century it broadly worked. But America's spending on the Vietnam War and domestic programmes sent dollars flooding abroad, far more than its gold could ever redeem, and foreign governments began quietly cashing in.
The end came on a Sunday evening. On 15 August 1971, President Richard Nixon announced on television that the United States was suspending the dollar's convertibility into gold — the "Nixon shock". It was billed as temporary. It was permanent. By 1973 the major currencies floated freely against one another, and money became what it has been ever since: fiat currency, backed not by metal in a vault but by law, taxation and trust in the institutions that issue it. Two centuries after Newton's accounting error, the last link between the world's money and gold was gone — though the bars, in Fort Knox and the vaults beneath the Bank of England, are still there.
Quiz nuggets
- Isaac Newton, as Master of the Royal Mint, set the 1717 gold-silver ratio that nudged Britain onto a de facto gold standard.
- William Jennings Bryan's 1896 "Cross of Gold" speech attacked the gold standard on behalf of indebted farmers.
- Executive Order 6102 (1933) required Americans to hand in most of their monetary gold; the official price then rose from $20.67 to $35 an ounce.
- Keynes attacked Britain's 1925 return to gold in a pamphlet titled The Economic Consequences of Mr Churchill.
- The "Nixon shock" of 15 August 1971 ended the dollar's convertibility into gold, closing the gold-standard era.