Gold standard

Overview

A gold standard is a monetary system in which the standard economic unit of account is defined by a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971, when the United States unilaterally terminated convertibility of the US dollar into gold, effectively ending the Bretton Woods system. Many states nonetheless hold substantial gold reserves. Historically, the silver standard and bimetallism have been more common than the gold standard. The shift to an international monetary system based on a gold standard reflected accident, network externalities, and path dependence. Great Britain accidentally adopted a de facto gold standard in 1717 when Isaac Newton, master of the Royal Mint, set the exchange rate of silver to gold too low, thus causing silver coins to go out of circulation. As Great Britain became the world's leading financial and commercial power in the 19th century, other states increasingly adopted Britain's monetary system. The gold standard was largely abandoned during the Great Depression before being reinstated in a limited form as part of the post-World War II Bretton Woods system. The gold standard was abandoned due to its propensity for volatility, as well as the constraints it imposed on governments: by retaining a fixed exchange rate, governments were hamstrung in engaging in expansionary policies to, for example, reduce unemployment during economic recessions. According to a 2012 survey of 39 economists, most (92 percent) agreed that a return to the gold standard would not improve price-stability and employment outcomes, and two-thirds of economic historians surveyed in the mid-1990s rejected the idea that the gold standard "was effective in stabilizing prices and moderating business-cycle fluctuations during the nineteenth century." Some economists suggest that the gold standard was a factor in prolonging and deepening the Great Depression. Historically, banking crises were more common during periods under the gold standard, while currency crises were less common. According to economist Michael D. Bordo, the gold standard has three benefits that made its use popular during certain historical periods: "its record as a stable nominal anchor; its automaticity; and its role as a credible commitment mechanism." The gold standard is supported by many followers of the Austrian School, free-market libertarians, and some supply-siders.

Implementation

The United Kingdom slipped into a gold specie standard in 1717 by over-valuing gold at 15+1⁄5 times its weight in silver. It was unique among nations to use gold in conjunction with clipped, underweight silver shillings, a problem addressed only before the end of the 18th century by the acceptance of gold proxies like token silver coins and banknotes. Under a gold standard, where coins circulated at face value, banks and public cash offices had to confirm that each coin still held roughly the amount of gold the law required. Normal wear alone gradually lowered a coin's weight, but clipping, filing, or sweating could strip gold away on purpose. To guard against this, most monetary systems set a pass weight: any coin that fell below it was withdrawn or simply refused. That requirement kept calibrated scales, coin weights, and mechanical testing devices in constant use. The Doppelkronensache, discovered in Lübeck in 1877, showed how the weight rule could be evaded. The affected 20-mark coins had been reduced after minting but remained above the legal minimum, so they passed the checks used at public cash offices. From the more widespread acceptance of paper money in the 19th century emerged the gold bullion standard, a system where gold coins do not circulate, but authorities like central banks agree to exchange circulating currency for gold bullion at a fixed price. First emerging in the late 18th century to regulate exchange between London and Edinburgh, Keynes (1913) noted how such a standard became the predominant means of implementing the gold standard internationally in the 1870s. Restricting the free circulation of gold under the Classical Gold Standard period from the 1870s to 1914 was also needed in countries which decided to implement the gold standard while guaranteeing the exchangeability of huge amounts of legacy silver coins into gold at the fixed rate (rather than valuing publicly held silver at its depreciated value). The term limping standard is often used in countries maintaining significant amounts of silver coin at par with gold, thus adding an additional element of uncertainty with the currency's value versus gold. The most common silver coins kept at limping standard parity included French 5-franc coins, German 3-mark thalers, Dutch guilders, Indian rupees, and U.S. Morgan dollars. Lastly, countries may implement a gold exchange standard, where the government guarantees a fixed exchange rate, not to a specified amount of gold, but rather to the currency of another country that is under a gold standard. This became the predominant international standard under the Bretton Woods Agreement from 1945 to 1971 by the fixing of world currencies to the U.S. dollar, the only currency after World War II to be on the gold bullion standard. Because each participating currency represented a fixed quantity of gold, the ratio of those quantities set its official exchange rates. Market rates could move within a narrow band because moving gold between countries cost money. The limits at which importing or exporting gold became profitable were known as the gold points.

Silver and bimetallic standards until the 19th century

The use of gold as money began around 600 BCE in Asia Minor and has been widely accepted ever since, together with various other commodities used as money, with those that lose the least value over time becoming the accepted form. In the early and high Middle Ages, the Byzantine gold solidus or bezant was used widely throughout Europe and the Mediterranean, but its use waned with the decline of the Byzantine Empire's economic influence. However, economic systems using gold as the sole currency and unit of account did not emerge before the 18th century. For millennia it was silver, not gold, which was the real basis of the domestic economies: the foundation for most money-of-account systems, for payment of wages and salaries, and for most local retail trade. Gold could not be used as currency and as a unit of account for daily transactions, due to various hindrances which were only resolved by tools that emerged in the 19th century, among them:

Divisibility: Gold as currency was hindered by its small size and rarity, with the dime-sized ducat of 3.4 grams representing 7 days' salary for the highest-paid workers. In contrast, coins of silver and billon (low-grade silver) easily corresponded to daily labor costs and food purchases, making silver more effective as currency and unit of account. In mid-15th century England, most highly paid skilled artisans earned 6d a day (six pence, or 5.4 g silver), and a whole sheep cost 12d. This made the ducat of 40d and the half-ducat of 20d of little use for domestic trade. Non-existence of token coinage for gold: Sargent and Velde (1997) explained how token coins of copper or billon exchangeable for silver or gold were almost non-existent before the 19th century. Small change was issued at almost full intrinsic value and without conversion provisions into specie. Tokens of little intrinsic value were widely mistrusted, were viewed as a precursor to currency devaluation, and were easily counterfeited in the pre-industrial era. This made the gold standard impossible anywhere with token silver coins; Britain itself only accepted the latter in the 19th century. Non-existence of banknotes: Banknotes were mistrusted as currency in the first half of the 18th century following France's failed banknote issuance in 1716 under economist John Law. Banknotes only became accepted across Europe with the further maturing of banking institutions, and also as a result of the Napoleonic Wars of the early 19th century. Counterfeiting concerns also applied to banknotes. The earliest European currency standards were therefore based on the silver standard, from the denarius of the Roman Empire to the penny (denier) introduced by Charlemagne throughout Western Europe, to the Spanish dollar and the German Reichsthaler and Conventionsthaler which survived well into the 19th century. Gold functioned as a medium for international trade and high-value transactions, but it generally fluctuated in price versus everyday silver money. A bimetallic standard emerged under a silver standard which gave popular gold coins like ducats a fixed value in terms of silver. In light of fluctuating gold–silver ratios in other countries, bimetallic standards were rather unstable and de facto transformed into a parallel bimetallic standard (where gold circulates at a floating exchange rate to silver) or reverted to a mono-metallic standard. France was the most important country which maintained a bimetallic standard during most of the 19th century.

Gold standard origin in Britain

The English pound sterling introduced c. 800 CE was initially a silver standard unit worth 20 shillings or 240 silver pennies. Each penny initially contained 1.35 g of fine silver, and its silver content was reduced by 1601 to 0.464 g (hence giving way to the shilling [12 pence] of 5.57 g fine silver). Hence the pound sterling was originally 324 g fine silver, but fell to 111.36 g by 1601. The problem of clipped, underweight silver pennies and shillings was a persistent, unresolved issue from the late 17th century to the early 19th century. In 1717 the value of the gold guinea (of 7.6885 g fine gold) was fixed at 21 shillings, resulting in a gold–silver ratio of 15.2, higher than prevailing ratios in Continental Europe. Great Britain was therefore de jure under a bimetallic standard with gold serving as the cheaper and more reliable currency compared to clipped silver (full-weight silver coins did not circulate and went to Europe where 21 shillings fetched over a guinea in gold). Several factors helped extend the British gold standard into the 19th century, namely:

The Brazilian Gold Rush of the 18th century supplying significant quantities of gold to Portugal and Britain, with Portuguese gold coins also legal tender in Britain. Trade deficits with China (which sold to Europe but had little use for European goods) drained silver from the economies of most of Europe. Combined with greater confidence in banknotes issued by the Bank of England, it opened the way for gold and banknotes to become acceptable currency in lieu of silver. The acceptability of token / subsidiary silver coins as substitutes for gold before the end of the 18th century. Initially issued by the Bank of England and other private companies, permanent issuance of subsidiary coinage from the Royal Mint commenced after the Great Recoinage of 1816. A proclamation of Queen Anne in 1704 introduced the British West Indies to the gold standard; it did not result in the wide use of gold currency and the gold standard, given Britain's mercantilist policy of hoarding gold and silver from its colonies for use at home. Prices were quoted de jure in gold pounds sterling, but were rarely paid in gold; the colonists' de facto daily medium of exchange and unit of account was predominantly the Spanish silver dollar. (Also explained in the history of the Trinidad and Tobago dollar.)

In the 19th century, after the Napoleonic Wars, Britain legally moved from the bimetallic to the gold standard in several steps:

The 21-shilling guinea was discontinued in favor of the 20-shilling gold sovereign, or £1 coin, which contained 7.32238 g fine gold. The permanent issuance of subsidiary, limited legal tender silver coinage, commencing with the Great Recoinage of 1816 The 1819 Act for the Resumption of Cash Payments, which set 1823 as the date for resumption of convertibility of Bank of England banknotes into gold sovereigns, and The Bank Charter Act 1844, which institutionalized the gold standard in Britain by establishing a ratio between gold reserves held by the Bank of England versus the banknotes which it could issue, and by significantly curbing the privilege of other British banks to issue banknotes. From the second half of the 19th century Britain introduced its gold standard to Australia, New Zealand, and the British West Indies in the form of circulating gold sovereigns as well as banknotes that were convertible at par into sovereigns or Bank of England banknotes. Canada introduced a gold dollar in 1867 at par with the U.S. gold dollar and with a fixed exchange rate to the gold sovereign.

Effects of the 19th century gold rush

Until 1850 only Britain and a few of its colonies were on the gold standard; most other countries were on the silver standard. France and the United States were two of the more notable countries on the bimetallic standard. France's actions in maintaining the French franc at either 4.5 g fine silver or 0.29032 g fine gold stabilized world gold–silver price ratios close to the French ratio of 15.5 in the first three quarters of the 19th century by offering to mint the cheaper metal in unlimited quantities – gold 20-franc coins whenever the ratio was below 15.5, and silver 5-franc coins whenever the ratio was above 15.5. The United States dollar was also bimetallic de jure until 1900, worth either 24.0566 g fine silver, or 1.60377 g fine gold (ratio 15.0); the latter was revised to 1.50463 g fine gold (ratio 15.99) from 1837 to 1934. The silver dollar was generally the cheaper currency before 1837, while the gold dollar was cheaper between 1837 and 1873. The California gold rush of 1849 and the Australian gold rushes soon afterwards in 1851 significantly increased world gold supplies and the minting of gold francs and dollars, as the gold–silver ratio went below 15.5, pushing France and the United States into the gold standard with Great Britain during the 1850s. The benefits of the gold standard were first felt by this larger bloc of countries, with Britain and France being the world's leading financial and industrial powers of the 19th century while the United States was an emerging power. By the time the gold–silver ratio reverted to 15.5 in the 1860s, this bloc of gold-utilizing countries grew further and provided momentum to an international gold standard before the end of the 19th century:

Portugal and several British colonies commenced with the gold standard in the 1850s and 1860s. France was joined by Belgium, Switzerland and Italy in a larger Latin Monetary Union based on both the gold and silver French francs. Several international monetary conferences in the last third of the 19th century began to consider the merits of an international gold standard, albeit with concerns on its impact on the price of silver should several countries make the switch.

Rollout in Eurasia and the United States

The international classical gold standard commenced in 1873 after the German Empire decided to replace the silver North German thaler and South German gulden with the German gold mark. The change was enacted in stages. The law of 4 December 1871 named one tenth of a new imperial gold coin a mark, divided it into 100 pfennigs and authorized gold coins of 10 and 20 marks. The Coinage Act of 9 July 1873 made the mark the unit of account of the Reich gold currency, which was to replace the state currencies. An imperial ordinance of 22 September 1875 set 1 January 1876 as the date on which the Reich currency came into force throughout Germany. During this early stage of the reform, the Doppelkronensache of 1877 showed that deliberately reduced 20-mark coins could still pass routine weight checks. The reform reflected the position taken at the first international monetary conference in 1867 and used the 5 billion gold francs, worth 4.05 billion marks or 1,451 metric tons, demanded from France after the Franco-Prussian War. The indemnity did not by itself explain the choice of gold. Wiegand argues that German policymakers also feared monetary isolation if France abandoned bimetallism while Germany remained on silver. France completed payment on 5 September 1873, and the Paris mint limited silver coinage the next day. Germany's transition prompted several other European countries to switch to gold in the 1870s and contributed to the suspension of unlimited silver 5-franc coinage in the Latin Monetary Union in 1873. The following countries switched from silver or bimetallic currencies to gold in the following years (Britain is included for completeness):

1816, British Empire: one pound: from 111.37 g silver to 7.32238 g gold; ratio 15.21 1873–1876, German Empire: one North German thaler or 13⁄4 South German gulden of 16.67 g silver, converted to 3 German gold marks of 3⁄2.79 = 1.0753 g gold; ratio 15.5 1873, Latin Monetary Union franc: from 4.5 g silver to 9⁄31 = 0.29032 g gold; ratio 15.5 1873, United States dollar, by the Coinage Act of 1873: from 24.0566 g silver to 1.50463 g gold; ratio 15.99 1875, Scandinavian Monetary Union: Rigsdaler specie of 25.28 g silver, converted to 4 krone (or krona) of 4⁄2.48 = 1.6129 g gold; ratio 15.67 1875, Netherlands: the Dutch Guilder from 9.45 g silver to 0.6048 g gold; ratio 15.625. 1881, Ottoman Empire: the Ottoman lira 1892, Austria-Hungary: the Austro-Hungarian florin of 11.11 g silver, converted to two Austro-Hungarian krone of 2⁄3.28 = 0.60976 g gold; ratio 18.22 1897, Russian Empire: the ruble from 18 g silver to 0.7742 g gold; ratio 23.25.

The gold standard became the basis for the international monetary system after 1873. According to economic historian Barry Eichengreen, "only then did countries settle on gold as the basis for their money supplies. Only then were pegged exchange rates based on the gold standard firmly established." Adopting and maintaining a singular monetary arrangement encouraged international trade and investment by stabilizing international price relationships and facilitating foreign borrowing. The gold standard was not firmly established in non-industrial countries.

Central banks and the gold exchange standard

As feared by the various international monetary conferences, the switch to gold, combined with record U.S. silver output from the Comstock Lode, drove down the price of silver after 1873, and the gold-to-silver ratio reached 18 by 1880. During its currency conversion, the German government withdrew old silver coins, melted them and sold the bullion. Because the silver price had fallen and losses were mounting, the sales were suspended on 19 May 1879. Most of continental Europe moved to the gold standard while leaving large quantities of older silver coins as legal tender at their face value. The German Coinage Act kept one-thaler pieces as legal tender at three marks each, and they retained that status through 30 September 1907. They ceased to be legal tender on 1 October 1907, but Reich and state treasuries continued to accept or exchange them at three marks until 30 September 1908. The term limping standard described currencies whose commitment to gold was called into question by the silver coins still in circulation. Other common examples were French 5-franc coins, Dutch guilders and American Morgan dollars. Britain's original gold specie standard with gold in circulation was no longer feasible with the rest of Continental Europe also switching to gold. The problem of scarce gold and legacy silver coins was only resolved by national central banks taking over the replacement of silver with national banknotes and token coins, centralizing the nation's supply of scarce gold, providing for reserve assets to guarantee convertibility of legacy silver coins, and allowing the conversion of banknotes into gold bullion or other gold-standard currencies solely for external purchases. This system is known as either a gold bullion standard whenever gold bars are offered, or a gold exchange standard whenever other gold-convertible currencies are offered. Central banks could defend convertibility by raising their discount rates. Higher rates could attract funds and gold from abroad, but they also tightened domestic credit and could weaken economic activity. John Maynard Keynes referred to both standards above as simply the gold exchange standard in his 1913 book Indian Currency and Finance. He described this as the predominant form of the international gold standard before the First World War, argued that a gold standard was generally impossible to implement before the 19th century due to the absence of recently developed tools (like central banking institutions, banknotes, and token currencies), and stated that a gold exchange standard was even superior to Britain's gold specie standard with gold in circulation. As discussed by Keynes:

The Gold-Exchange Standard arises out of the discovery that, so long as gold is available for payments of international indebtedness at an approximately constant rate in terms of the national currency, it is a matter of comparative indifference whether it actually forms the national currency ... The Gold-Exchange Standard may be said to exist when gold does not circulate in a country to an appreciable extent, when the local currency is not necessarily redeemable in gold, but when the Government or Central Bank makes arrangements for the provision of foreign remittances in gold at a fixed maximum rate in terms of the local currency, the reserves necessary to provide these remittances being kept to a considerable extent abroad. Its theoretical advantages were first set forth by Ricardo (i.e. David Ricardo, 1824) at the time of the Bullionist Controversy. He laid it down that a currency is in its most perfect state when it consists of a cheap material, but having an equal value with the gold it professes to represent; and he suggested that convertibility for the purposes of the foreign exchanges should be ensured by the tendering on demand of gold bars (not coin) in exchange for notes, so that gold might be available for purposes of export only, and would be prevented from entering into the internal circulation of the country. The first crude attempt in recent times at establishing a standard of this type was made by Holland. The free coinage of silver was suspended in 1877. But the currency continued to consist mainly of silver and paper. It has been maintained since that date at a constant value in terms of gold by the Bank's regularly providing gold when it is required for export and by its using its authority at the same time for restricting so far as possible the use of gold at home. To make this policy possible, the Bank of Holland has kept a reserve, of a moderate and economical amount, partly in gold, partly in foreign bills.

Since the Indian system (gold exchange standard implemented in 1893) has been perfected and its provisions generally known, it has been widely imitated both in Asia and elsewhere ... Something similar has existed in Java under Dutch influences for many years ... The Gold-Exchange Standard is the only possible means of bringing China onto a gold basis ... The classical gold standard of the late 19th century was therefore not merely a superficial switch from circulating silver to circulating gold. The bulk of silver currency was actually replaced by banknotes and token currency whose gold value was guaranteed by gold bullion and other reserve assets held inside central banks. In turn, the gold exchange standard was just one step away from modern fiat currency with banknotes issued by central banks; its value is secured by the bank's reserve assets, but its exchange value is determined by the central bank's monetary policy objectives on its purchasing power in lieu of a fixed equivalence to gold.

Rollout to South and East Asia and Mexico

In the final chapter of the classical gold standard, ending in 1914, the gold exchange standard was extended to many Asian countries by fixing the value of local currencies to gold or to the gold standard currency of a Western colonial power. The Netherlands East Indies guilder was the first Asian currency pegged to gold in 1875, via a gold exchange standard which maintained its parity with the gold Dutch guilder. In the period leading up to 1892, there were various international monetary conferences, and various countries pledged to maintain the limping standard of freely circulating legacy silver coins in order to prevent a further increase in the gold–silver ratio, which reached 20 in the 1880s. After 1890, however, silver's price decline could not be prevented further, and the gold–silver ratio rose sharply above 30. In 1893 the Indian rupee of 10.69 g fine silver was fixed at 16 British pence (or £1 = 15 rupees; gold–silver ratio 21.9), with legacy silver rupees remaining legal tender. In 1906 the Straits dollar of 24.26 g silver was fixed at 28 pence (or £1 = 84⁄7 dollars; ratio 28.4). Similar gold standards were implemented in Japan in 1897, in the Philippines in 1903, and in Mexico in 1905 when the previous yen or peso of 24.26 g silver was redefined to approximately 0.75 g gold or half a U.S. dollar (ratio 32.3). Japan gained the needed gold reserves after the Sino-Japanese War of 1894–1895. In Japan, moving to gold was considered vital to gain access to Western capital markets.

"Rules of the Game"

In the 1920s John Maynard Keynes retrospectively developed the phrase "rules of the game" to describe how central banks would ideally implement a gold standard during the prewar classical era, assuming international trade flows followed the ideal price–specie flow mechanism. Violations of the "rules" actually observed during the classical gold standard era from 1873 to 1914, however, reveal how much more powerful national central banks actually are in influencing price levels and specie flows, compared to the "self-correcting" flows predicted by the price-specie flow mechanism. Keynes premised the "rules of the game" on best practices of central banks to implement the pre-1914 international gold standard, namely:

To substitute gold with fiat currency in circulation, so that gold reserves may be centralized To allow a prudently determined ratio of gold reserves to fiat currency of less than 100%, with the difference made up by other loans and invested assets and such reserve ratio amounts consistent with fractional reserve banking practices To exchange circulating currency for gold or other foreign currencies at a fixed gold price, and to freely permit gold imports and exports Central banks were allowed modest margins in exchange rates to reflect gold delivery costs while still adhering to the gold standard. To illustrate this point, France might ideally allow the pound sterling (worth 25.22 francs based on ratios of their gold content) to trade between so-called gold points of 25.02 F and 25.42 F (to allow for an assumed 0.20F/£ in gold delivery costs). France would prevent sterling from climbing above 25.42 F by delivering gold worth 25.22 F or £1 (spending 0.20 F for delivery), and from falling below 25.02 F by the reverse process of ordering £1 in gold worth 25.22 F in France (and again, minus 0.20F in costs). Finally, central banks were authorized to suspend the gold standard in times of war until it could be restored again after the emergency ended. Central banks were also expected to maintain the gold standard on the ideal assumption of international trade operating under the price–specie flow mechanism proposed by economist David Hume, in which:

Countries which exported more goods would receive specie (gold or silver) inflows, at the expense of countries which imported those goods. More specie in exporting countries would result in higher price levels there, and conversely in lower price levels amongst countries spending their specie. Price disparities would self-correct as lower prices in specie-deficient countries would attract spending from specie-rich countries, until price levels in both places equalize again. In practice, however, specie flows during the classical gold standard era failed to self-correct as described above. Gold found its way back from surplus to deficit countries to exploit price differences only painfully slowly, and central banks found it far more effective to raise or lower domestic price levels by lowering or raising domestic interest rates. High-price-level countries may raise interest rates to lower domestic demand and prices, but this may also trigger gold inflows from investors – contradicting the premise that gold will flow out of countries with high price levels. Purchases or sales of domestic assets by developed economies to international investors also turned out to be more effective in influencing gold flows than the self-correcting mechanism predicted by Hume. Another set of violations to the "rules of the game" involved central banks not intervening in a timely manner even as exchange rates went outside the "gold points" (in the example above, cases existed of the pound climbing above 25.42 francs or falling below 25.02 francs). Central banks were found to pursue other objectives other than fixed exchange rates to gold (e.g., lower domestic prices, or stopping huge gold outflows), though such behavior is limited by public credibility on their adherence to the gold standard. Keynes described such violations occurring before 1913 by French banks limiting gold payouts to 200 francs per head and charging a 1% premium, and by the German Reichsbank partially suspending free payment in gold, though "covertly and with shame". Some countries had limited success in implementing the gold standard even while disregarding such "rules of the game" in their pursuit of other monetary policy objectives. Inside the Latin Monetary Union, the Italian lira and the Spanish peseta traded outside typical gold-standard levels of 25.02–25.42 F/£ for extended periods of time:

Italy tolerated in 1866 the issuance of corso forzoso (forced legal tender paper currency) worth less than the Latin Monetary Union franc. It also flooded the Union with low-valued subsidiary silver coins worth less than the franc. For the rest of the 19th century the Italian lira traded at a fluctuating discount versus the standard gold franc. In 1883 the Spanish peseta went off the gold standard and traded below parity with the gold French franc. However, as the free minting of silver was suspended to the general public, the peseta had a floating exchange rate between the values of the gold franc and the silver franc. The Spanish government captured all profits from minting duros (5-peseta coins) out of silver bought for less than 5 ptas. While total issuance was limited to prevent the peseta from falling below the silver franc, the abundance of duros in circulation prevented the peseta from returning to par with the gold franc. Spain's system in which the silver duro traded at a premium above its metallic value due to relative scarcity is called the fiduciary standard; it was similarly implemented in the Philippines and other Spanish colonies at the end of the 19th century.

Inception

In the 1780s, Thomas Jefferson, Robert Morris and Alexander Hamilton recommended to Congress that a decimal currency system be adopted by the United States. The initial recommendation in 1785 was a silver standard based on the Spanish milled dollar (finalized at 371.25 grains or 24.0566 g fine silver), but in the final version of the Coinage Act of 1792 Hamilton's recommendation to include a $10 gold eagle was also approved, containing 247.5 grains (16.0377 g) fine gold. Hamilton therefore put the U.S. dollar on a bimetallic standard with a gold–silver ratio of 15.0. American-issued dollars and cents remained less common in circulation than Spanish dollars and reales (1⁄8th dollar) for the next six decades until foreign currency was demonetized in 1857. $10 gold eagles were exported to Europe, where they could fetch over ten Spanish dollars due to their higher gold ratio of 15.5. American silver dollars also compared favorably with Spanish dollars and were easily used for overseas purchases. In 1806 President Jefferson suspended the minting of exportable gold coins and silver dollars in order to divert the United States Mint's limited resources into fractional coins which stayed in circulation.

Pre-Civil War

The United States also embarked on establishing a national bank with the First Bank of the United States in 1791 and the Second Bank of the United States in 1816. In 1836, President Andrew Jackson failed to extend the Second Bank's charter, reflecting his sentiments against banking institutions as well as his preference for the use of gold coins for large payments rather than privately issued banknotes. A return to a gold standard would require a reduction in the dollar's gold equivalence, and in the Coinage Act of 1834 the gold–silver ratio was increased to 16.0 (ratio finalized in 1837 to 15.99 when the fine gold content of the $10 eagle was set at 232.2 grains or 15.0463 g). Gold discoveries in California in 1848 and later in Australia lowered the gold price relative to silver; this drove silver money from circulation because it was worth more in the market than as money. Passage of the Independent Treasury Act of 1848 placed the U.S. on a strict hard-money standard. Doing business with the American government required gold or silver coins. Government accounts were legally separated from the banking system. However, the mint ratio (the fixed exchange rate between gold and silver at the mint) continued to overvalue gold. In 1853, silver coins of 50 cents and below were reduced in silver content and could not be requested for minting by the general public (only the U.S. government could request this). In 1857 the legal tender status of Spanish dollars and other foreign coinage was repealed. In 1857 the final crisis of the free banking era began as American banks suspended payment in silver, with ripples through the developing international financial system.

Post-Civil War

Due to the inflationary finance measures undertaken to help pay for the U.S. Civil War, the government found it difficult to pay its obligations in gold or silver and suspended payments of obligations not legally specified in specie (gold bonds); this led banks to suspend the conversion of bank liabilities (banknotes and deposits) into specie. In 1862 paper money was made legal tender. It was a fiat money (not convertible on demand at a fixed rate into specie). These notes came to be called "greenbacks". After the Civil War, Congress wanted to re-establish the metallic standard at pre-war rates. The market price of gold in greenbacks was above the pre-war fixed price ($20.67 per ounce of gold) requiring deflation to achieve the pre-war price. This was accomplished by growing the stock of money less rapidly than real output. By 1879 the market price of the greenback matched the mint price of gold, and according to Barry Eichengreen, the United States was effectively on the gold standard that year. The Coinage Act of 1873 (also known as the Crime of '73) suspended the minting of the standard silver dollar (of 412.5 grains, 90% fine), the only fully legal tender coin that individuals could convert silver bullion into in unlimited quantities (a policy known as free silver), and right at the onset of the silver rush from the Comstock Lode in the 1870s. Political agitation over the inability of silver miners to monetize their produce resulted in the Bland–Allison Act of 1878 and Sherman Silver Purchase Act of 1890 which made compulsory the minting of significant quantities of the silver Morgan dollar. With the resumption of convertibility on June 30, 1879, the government again paid its debts in gold, accepted greenbacks for customs and redeemed greenbacks on demand in gold. While greenbacks made suitable substitutes for gold coins, American implementation of the gold standard was hobbl