Gold and the Gold Standard

CHAPTER VI

Varieties of the Gold Standard

It takes all sorts to make a world.—ENGLISH PROVERB, 1620.

Historically speaking, as we have seen, and taking in our survey the whole world, there have been many ways in which gold has functioned as standard money, both outside a formally organized gold-standard system and as part of such a system. All important gold-standard systems, however, may be conveniently grouped into three species, viz., the gold-coin standard, the gold-exchange standard, and the gold-bullion standard, while each of these species appears in many varieties, both alone and in combination with the other two. The gold-exchange standard and the gold-bullion standard, in their modern forms, are institutions of the late nineteenth and early twentieth centuries, although their roots reach deep into the past.

THE GOLD-COIN STANDARD

By far the most important form of the gold standard has been the gold-coin standard. This is the form that is chiefly contemplated in the last four chapters of this book. Since the varietal characteristics of the gold-coin standard have already been considered, a mere summary of them here will be sufficient. They may, then, be summed up as follows: The parity of all forms of money and of deposit currency is maintained with the value of a gold monetary unit, which is coined (singly or in multiples), under a system of free coinage, without appreciable charge for the coinage process. Gold coins are permitted to circulate freely throughout the country, may be freely exported and imported, may be melted, are unlimited legal tender, and are acceptable without limit in payment of all taxes and other government dues. They constitute all, or a large part of, the country’s central monetary reserve, which functions as a regulator fund to maintain the parity of the nation’s money by adjusting the supply of money and of deposit currency to the ever-changing demands of trade.

The manner in which the gold-coin standard functions will be somewhat further clarified by the following explanation of the gold-exchange standard, because all three varieties of the gold standard (gold-coin, gold-exchange, and gold-bullion) function on the same fundamental principles.

THE GOLD-EXCHANGE STANDARD

Although crude plans suggestive of the modern gold-exchange standard were proposed from time to time during the eighteenth and the early nineteenth century,1 and some of them were used, the first fully worked-out gold-exchange standard plan was that of A. M. Lindsay of the Bank of Bengal, which he recommended for India, first in 1876 and repeatedly thereafter. He presented the Lindsay plan in a complete form in his testimony before the Indian Currency Committee of 1898.2 In his elaboration and defense of his plan, Mr. Lindsay did a masterly job and probably contributed more than anyone else toward making the idea of the gold-exchange standard current coin. The Indian government rejected the plan at the time, but adopted it in its essentials a few years later.3

Principles of the Gold-exchange Standard as Exemplified in the Philippines, 1905-1910

Several countries, including Java, India, and Austria-Hungary, adopted the gold-exchange standard before the end of the nineteenth century, and between 1920 and 1930 literally scores of countries adopted the principle of the gold-exchange standard to a greater or less extent. Nonetheless, the nearest approach to the simon-pure gold-exchange standard that the world has yet seen was the currency system of the Philippine Islands as it was administered from 1905 to about 1910 under the Philippine Gold Standard Act of 1903. A description of the essentials of this system will be the best way to make clear the fundamentals of the gold-exchange standard.4

At the beginning of this period the currency of the Philippine Islands consisted chiefly of fiduciary silver coins and silver certificates, fractional coins, and for a brief t£me considerable United States paper money.

The Philippine Coinage Act passed by the United States Congress, March 2,1903, had declared that the unit of value of the Philippine Islands should be a theoretical gold peso (not coined), consisting of 12.9 grains of gold, 0.900 fine, and therefore exactly equivalent to 50 cents of United States gold coin of that time. The law required that the silver peso and all the fractional coins of the Islands should be kept at parity with this gold peso.

For maintaining the parity, the Philippine Gold Standard Act of October 10, 1903, enacted by the Philippine Government under the authority of the above-mentioned law, created a special reserve fund known as the gold-standard fund. This fund was composed of the proceeds of a loan floated in the United States, of all seigniorage profits realized in the coinage of the new money, and of certain other profits incidental to the administration of the currency. It was a trust fund, kept separate from all other government funds, and was to be used exclusively for the maintenance of the gold parity of the Philippine currency. The law provided that part of the fund should be kept in Manila and part in the United States.

For the maintenance of the parity the principal form of redemption5 was in gold drafts on New York. The Philippine treasurer was directed to sell, on demand for Philippine currency, drafts in sums of not less than $5,000 (the equivalent of the conventional gold bar of commerce) on that part of the gold-standard fund kept on deposit in American banks,6 charging for the same a premium of ¾ of 1 per cent for demand drafts and of 1⅛ per cent for telegraphic transfers. It was likewise provided in the law that banks in the United States that acted as depositories of the gold-standard fund should sell drafts in sums of not less than 10,000 pesos on that part of the gold-standard fund held in the treasury vaults in Manila, payable in Philippine currency, charging for them the same premium rates.

All Philippine currency brought to the Philippine Treasury for the purchase of exchange on the United States, pursuant to the above provisions of law, was required immediately to be withdrawn from circulation and physically kept in the treasury vaults. The money so withdrawn from circulation, with certain qualifications, could not be paid out again, except in response to drafts drawn by a gold-standard fund depository bank in the United States, on the fund in Manila, or for the purchase of silver to provide a needed increase in coinage.

The object of the sale of drafts was to provide a means for maintaining the gold parity. Every important function of a gold currency, except that of shipment to and from other countries in making international payments, it was claimed, could be performed as well by the Philippine silver and paper currency as by gold coin. This Philippine silver and paper currency, it was said, was better adapted than gold coin would have been to the needs of Philippine trade and to the tastes of the great majority of the Filipino people. Some provision, however, had to be made for the performance of that essential function of money, the function of making international payments, which could not be performed by Philippine fiduciary money. This function of money, or of bullion promptly exchangeable for money on demand, is important not only because it provides a means by which foreign payments are made, but still more so because through it the currency supply is kept adjusted to the currency demand, and the parity is maintained by a reduction of the supply of money in circulation in times of its relative redundancy and by an increase of the supply in times of its relative scarcity.

When, in the trade among gold-standard countries, the balance of payments becomes strongly unfavorable in one of them, exchange rates rise to the gold-export point, registering a relative redundancy of the home currency, gold is exported, and the currency supply is contracted. Likewise, it is true that, when the balance of payments becomes strongly favorable in one of the countries, exchange rates there fall to the gold-import point, registering a relative scarcity of the home currency, gold is imported, and the currency supply is expanded. Gold will ordinarily be shipped only when the exchange drawn against the shipment will be sufficient to yield some profit after the payment of all the expenses of shipping, including packing, cartage, freight, insurance, interest, and loss from abrasion.

When exchange rates in Manila on New York rose to the gold-export point, gold bars (or gold coins) were not exported, as they would have been under similar circumstances in a gold-coin standard country like the United States, but the Philippine government gave the would-be gold exporter, in exchange for his Philippine currency in Manila, a draft (in multiples of $5,000) entitling him to the gold credit in New York, and charged him as a premium for the draft simply the amount that the actual exportation of the equivalent in gold bars from Manila to New York would have cost him, had he exported the gold himself. The Philippine pesos paid to the government for the draft (exclusive of the premium) were equivalent at parity to the amount of gold he would have shipped. They (including the premium charged) were withdrawn from circulation by the Philippine government and stored in the vaults of the gold-standard fund—a procedure that reduced the circulation of Philippine currency as effectively as the actual exportation of an equivalent amount of Philippine gold coins would have done.

On the other hand, when exchange rates in Manila on New York fell to Manila’s gold-import point (which would mean that in New York rates on Manila had risen to New York’s gold-export point), a depository of the Philippine gold-standard fund in New York gave the would-be gold exporter in New York, in exchange for his gold (or its equivalent in United States currency), a draft entitling him to the equivalent in Philippine pesos laid down in Manila, and charged him (for the credit of the Philippine gold-standard fund in New York) a premium sufficient to cover the expenses that he would have incurred under the gold-coin standard, had he actually shipped the equivalent in gold bars (or gold coin) from New York to Manila. When the drafts on the gold-standard fund were presented in Manila for payment, they were paid in pesos that were physically withdrawn from the vaults of the gold-standard fund, and this payment increased the Philippine currency circulation as truly as would the importation into the islands of an equivalent amount of Philippine gold coins.

The system was just as automatic in its adjustment of the money supply to the needs of trade in the Philippines as a gold-coin standard would have been, although there was no gold coin in circulation and no gold reserve was there required. Normally the government had nothing to do with the commercial exchanges, except at the gold-shipping points. These points represented the limits of fluctuation in the gold-exchange value of the peso, which the government imposed. When exchange rates rose to the gold-export point, the government virtually said, “So far they may rise and no farther. A further advance would signify a depreciation of our peso below its legal gold par if we were on a gold-coin standard, and it will be so interpreted under the gold-exchange standard; therefore, we will sell on demand gold drafts on New York in unlimited quantities at these gold-export point rates, and will relieve the currency redundancy by withdrawing from circulation the pesos paid to us for these drafts.”

On the other hand, when exchange rates in Manila fell to the gold-import point, the government virtually said, “So far they may fall and no farther; a further decline would signify an appreciation of our peso above its legal gold parity if we were on a gold-coin standard, and it will be so interpreted under the gold-exchange standard; therefore, we will sell on demand pesos laid down in Manila in unlimited quantities at these gold-import point rates, to be paid for by gold or its equivalent in New York. This will relieve the currency scarcity in the islands by pouring pesos into circulation from the gold-standard fund.” Commercial exchange rates, therefore, could not rise or fall appreciably beyond these respective limits, and between them the government normally had nothing to do with exchange. That was the field of the banks.

Advantages of the Gold-exchange Standard to the Philippines

The advantages to the Philippines of the gold-exchange standard over a strict gold-coin standard were two-fold. (1) The gold-exchange standard enabled the country to have a circulating medium of the kind best adapted to its needs. Gold coin was not well fitted to the needs of the Philippines, the great bulk of whose transactions were small. Silver and paper were much better. (2) There was the advantage of economy, and this was a matter of great importance to a country like the Philippines, which wanted to be on a gold basis but could not afford the luxury of a gold-coin or even of a gold-bullion standard. Although possibly a larger gold reserve was needed under the gold-exchange standard than would have been needed under a gold-coin standard, the net expense was not proportionately so large. This was true for several reasons: (a) The money of circulation was all fiduciary money and therefore much less expensive than it would have been if a large part of it were full-weight gold coins. No gold coins and no gold bars were hoarded, and no gold reserve was maintained in the country to meet the possible demands of would-be hoarders. Conversion of local money into gold was normally made only through foreign drafts, of which the minimum amount sold was the equivalent of a gold bar of $5,000. (b) Under the Philippine gold-exchange standard the country’s monetary gold was more effective than under a gold-coin standard, as it was all in one reservoir (e.g., the gold-standard fund), where every dollar could be immediately used in time of need; whereas, gold coin in circulation and gold bars in private hands are difficult to mobilize in emergencies. The very emergency that creates the demand for the gold often causes the public to cling to it more tightly, (c) The premiums realized by the government on exchange yielded the reserve fund a good profit, (d) The part of the gold-standard fund deposited abroad earned interest.

Except under unusual circumstances, the Philippine gold-standard fund continually increased in amount. This was true because (aside from the slight expenses connected with the currency administration that were chargeable to the fund) money was never paid out of the fund at one office (Manila or New York) except in return for a larger sum paid into the fund in the other office. Whenever the fund was temporarily reduced for the purchase of silver (or nickel or copper) to meet the need of new coinage, it was later increased by the new coins to the amount withdrawn, and, in addition, by the net seigniorage profits on the new coinage.

The only times when the fund could be materially depleted in amount (aside from the remotely possible losses by theft or by failure of a depository bank) were times of extreme business depression, when, because of a great decline in business, the currency needs of the country might fall off decidedly and remain below normal for a considerable period of time. Under such contingencies, the silver peso reserve in Manila might be unduly increased by the continually heavy purchases in Manila of drafts on New York, and the gold part of the fund in New York might be correspondingly depleted by the payment of these drafts.

If the depression were so severe that the movement was not checked by the usual forces before the danger point was reached, the gold fund in New York could be replenished through the forward sale in New York by cable from Manila of a few million ounces of silver, to be obtained by the government through the breaking up of the excess pesos held in the peso part of the fund in Manila. The gold proceeds of this sale of silver bullion would then be deposited to the credit of the fund in New York. Here the fund would suffer a loss of the difference between the nominal, or money, value of the pesos broken up and sold as silver and the price obtained for the silver bullion, to which would be added the expenses of the transaction. This would be the opposite of a seigniorage profit—a sort of negative seigniorage. Such a measure would be adopted only as a last resort, however, and the need for taking this step would be evidence that for the existing trade needs too many pesos had been coined. The Philippines never had such an experience.

Under ordinary circumstances the depletion of the gold fund in New York would be checked before it had gone far by processes analogous to those that normally prevent an undue exportation of gold from a gold-coin standard country.7 They are, notably, (1) a tightening of the money market in Manila through the withdrawal from active circulation and from bank reserves of the large quantities of pesos physically deposited in the gold-standard fund vaults of Manila, (2) the stimulus given to merchandise exports by the prevailing high exchange rates, and (3) the retardation of merchandise imports caused by the same high rates.

The Gold-exchange Standard and the First World War

Prior to the First World War there was a considerable development of the gold-exchange standard along the lines of the standards of the Philippines and India. This was particularly true in colonies and other dependencies and in small countries. In 1914, Keynes. wrote,8 “It may fairly be said . . . that in the last ten years the Gold-exchange Standard has become the prevailing monetary system of Asia.”

When in 1914 the war came, metallic-money standards throughout the world broke down, and for years people nearly everywhere found themselves on widely fluctuating paper-money standards. After peace was restored and the world again turned longingly to the gold standard as the only monetary standard in which it had confidence, the gold-exchange standard came forward with a strong appeal. It was the least expensive form of the gold standard known, and this was an important consideration in a war-bankrupt world. It was also the form that was most economical in the use of gold. This likewise was important, because gold production had greatly declined from 1915 to 1922, and there was much public concern about the adequacy of the world’s future supply of gold to meet the requirements of a world-wide return to the yellow metal.

The Genoa International Conference and the Gold-exchange Standard

The Genoa International Conference in 1922 took a strong stand in favor of the gold-exchange standard.9 Its principal recommendations relating to this subject are these:10

Measures of currency reform will be facilitated if the practice of continuous cooperation among central banks of issue . . . in the several countries can be developed.. . . In countries where there is no central bank of issue one should be established.. . . It is desirable that all European currencies should be based upon a common standard.. . . Gold is the only common standard which all European countries could at present agree to adopt.. . . Successful maintenance [of the standard] would be materially promoted, not only by the proposed collaboration of central banks, but by an international Convention to be adopted at a suitable time. The purpose of the Convention would be to centralise and coordinate the demand for gold, and so to avoid those wide fluctuations in the purchasing power of gold, which might otherwise result from the simultaneous and competitive efforts of a number of countries to secure metallic reserves. The Convention should embody some means of economising the use of gold by maintaining reserves in the form of foreign balances, such, for example, as the gold exchange standard, or an international clearing system....

When progress permits, certain of the participating countries will establish a free market in gold and thus become gold centres . . . : A participating country, in addition to any gold reserves held at home, may maintain in any other participating country reserves of approved assets in the form of bank balances, bills, short-terms securities or other suitable liquid resources . . . The ordinary practice of a participating country will be to buy and sell exchange on other participating countries within a prescribed fraction of parity, in exchange for its own currency on demand.. . . The Convention will thus be based on a gold exchange standard. The condition of continuing membership will be the maintenance of the national currency unit at the prescribed value. Failure in this respect will entail suspension of the right to hold the reserve balances of other participating countries....

Each country will be responsible for the necessary legislative and other measures required to maintain the international value of its currency at par, and will be left entirely free to devise and apply the means, whether through regulation of credit by central banks or otherwise.. . . Credit will be regulated, not only with a view to maintaining the currencies at par with one another, but also with a view to preventing undue fluctuations in the purchasing power of gold. It is not contemplated, however, that the discretion of the central banks should be fettered by any definite rules for this purpose, but that their collaboration will have been assured in matters outside the province of participating countries....

All artificial control of operations in exchange . . . should be abolished at the earliest possible date....

The central banks concerned would agree to provide facilities for holding foreign balances (and securities) on deposit on account of other central banks, under special guarantees from each bank and from its Government as to the absolute liquidity and freedom of movement of such balances under all conditions, and their absolute exemption from taxation, forced loans and moratorium....

Widespread Adoption of the Principle of the Gold-exchange Standard

For some years immediately following the report of the Genoa Conference, the principle of the gold-exchange standard in varying degrees was incorporated into the reconstructed monetary systems of most countries. The Bank for International Settlements11 has tabulated the annual figures for the foreign-exchange holdings of European central banks for the period 1924 to 1932. Twenty-one of these banks had such holdings on the dates given for all 9 years, and three others had them for part of the time. The total amounts for the specific dates ranged from 12.9 billion French francs in 1928 to 2.9 billion in 1932.

The postwar gold-exchange standard rarely appeared, however, in anything like its pure form; and it was usually coupled, to a greater or less extent, with elements of the gold-bullion standard.

The Postwar Gold-exchange Standard Functioned through Central Banks. Unlike the prewar gold-exchange standard of the Orient, the standard after the war functioned largely through central banks of issue—a fact that necessarily brought about important changes in its character. In many countries, at least a specified minimum percentage of the legal reserve had to be kept in gold bullion and gold coin. This minimal percentage varied widely in different central banks. In other countries, any part or even all of the legal reserve, at the discretion of the central bank, could be kept in “foreign-exchange holdings.” There were also great differences in the various countries as to the forms that these foreign-exchange holdings were permitted to take; e.g., deposits in central banks and in the Bank for International Settlements, deposits in private banks, bank acceptances, trade acceptances, and short-time obligations of governments.

When under the prewar Philippine type of the gold-exchange standard a government sold for cash at home drafts on a reserve fund located abroad, it withdrew from circulation the purchase money and contracted the monetary circulation by the amount withdrawn; and when the foreign depository of the reserve sold drafts on the reserve fund in the home country, the draft was paid in cash, increasing the monetary circulation by its full amount. On the other hand, under the gold exchange standard of the later period when the agency within the home country that sold the draft on the reserve located abroad was a central bank of issue, and the funds received by it from the purchaser of the draft were bank funds, consisting chiefly of its own bank notes and of checks drawn by its member banks, no contraction of the currency was necessarily involved. The transaction was more in the nature of a transfer of credit, and the funds received by the central bank could be put back into circulation again at its discretion. On the other hand, the redemption of drafts drawn by the central bank’s reserve agency abroad on the bank’s reserve at home likewise did not of necessity involve any enduring expansion of the circulation at home.

It did not follow, therefore, under the postwar type of the gold-exchange standard that, when exchange rates rose to the gold-export point, registering a relative redundancy of the home currency, the redundancy would be removed by the sale of gold-reserve drafts; and that a decline of exchange rates to the gold-import point, registering a relative scarcity of money at home, would lead to an expansion of the currency in response to sales of drafts by the reserve agency abroad drawn on the reserve at home.

To meet this difficulty, some mechanism needed to be devised to bring about the required adjustments in the currency supply. The following method, with minor variations, was employed in many countries, including Chile, Colombia, Ecuador, Bolivia, and Peru. The example here cited is taken from the Peruvian central bank law of 1930.

In Peru the principal money of the country consisted of notes issued by the central bank, and the only central reserve used for maintaining the gold parity was that of the central bank. A large part of this reserve was kept in foreign financial centers, usually New York and London, in the form of bank deposits and of highly liquid short-time paper. The central bank obligated itself to sell drafts on a foreign depository, on demand, at the gold-export point, and provided for the sale of drafts by such a depository on the central bank at home, on demand, at the home gold-import point. These gold points marked the limits, as in the gold-coin standard, beyond which exchange was not permitted to go.

Under this system, in order to assure a contraction of the currency when sales of drafts at the gold-export point were depleting the gold reserves held abroad, the law provided that the central bank must pay a tax, the rate of which increased progressively as the bank’s percentage of gold reserves declined below a certain specified point. The law provided also that the equivalent of this tax should be added to the central bank’s discount rates. These requirements tended to enforce a contraction of the circulation when the currency was relatively redundant and when, under the gold-coin standard, currency contraction would have been effected by gold exports. Under such requirements the central bank could expand its credit and increase its note circulation when its reserves were low and declining, but only at a progressively increasing expense to the borrower and/or at a progressively declining rate of profit to itself.

On the whole, and allowing for a few important exceptions, the postwar gold-exchange standard functioned successfully for several years, under principles laid down by the Genoa Conference, many of which had been widely adopted. Then, however, as the pressures that led to the world crisis beginning in 1928 to 1929 began to be felt, these principles were increasingly ignored, and gold-exchange standards, like gold-bullion standards and gold-coin standards, broke down in the crisis and depression of the early thirties;

Weaknesses of the Postwar Gold-exchange Standard

Here one enters a technical and controversial field, in which only a few of the outstanding points need be considered in a study such as the present one.

The principal criticisms that have been made against the gold-exchange standard are the following:

1. The Pyramiding of Gold Reserves. Critics claimed that, in effecting an economy in the use of gold, the gold-exchange standard often carried too far the pyramiding of gold reserves. A computation, in a typical situation, of the “ultimate gold reserve required to be held somewhere,” under a gold-coin standard and the gold-exchange standard, respectively, for a country like Peru, showed 23 per cent for the gold-coin standard and 1½ per cent for the gold-exchange standard.12 In some instances, the attenuation of these “foreign-exchange reserves,” by way of pyramided credit, was much greater and, in extreme cases, it extended into rather “hot” money markets.13 To help meet this difficulty, and at the same time enable the respective foreign central banks to keep informed regarding the volume of the exchange-reserve investments in the markets for which they are responsible, it would be good policy for central banks operating gold-exchange standards at home to conduct exchange-reserve operations abroad only with and through central banks and the Bank for International Settlements.

2. Lack of Efficient Checks and Balances. Another claim is that the gold-exchange standard does not automatically function so effectively, i.e., set up as efficient a set of forces of checks and balances as does the gold-coin standard. Under the latter, one country exports gold at its gold-export point and another country receives the gold at its gold-import point. The monetary supply is contracted in the country exporting the gold and is expanded in the country importing it. Under a gold-exchange standard functioning through central banks at both ends of the line, drafts purchased at home, drawn on the reserve deposit abroad, are usually debited to a bank-deposit account at home and credited to one abroad ; and the opposite takes place when a draft is sold by the reserve agent abroad on the central bank at home.

Such transactions normally would make no change in the amount of money in circulation within the home market or in the foreign ones. They would tend to decrease the volume of bank deposits in the country of the person buying the draft and to increase them in the country of the person receiving it. This, however, is a very different thing from the contraction and expansion of basic monetary gold in the respective countries. Ordinarily, a central bank through its loan, discount, investment, and exchange market policies is in position at will substantially to expand or contract its deposits, which are themselves the reserves of member banks.

The common statutory provisions for enforcing the desired currency contraction or expansion, at the gold points, through progressive taxes on reserve deficiencies and the passing on of these taxes to the public by adding their equivalent to the central bank’s discount rate, were not wholly effective. In the first place, the “market might not be in the bank,” and in the second place central banks were reluctant to pass the tax on to the borrower, since, if they absorbed it themselves, they could often take it out of profits that would otherwise be passed on to the government anyway in the form of a franchise tax or otherwise.

3. Lack of Control by Authorities in the Home Country. A group of further objections to the gold-exchange standard grows out of the fact that the gold reserves of a country are less in control of its own authorities when the reserves are deposited or otherwise invested abroad than when they are kept physically in the home country.14 “If you have your gold at home . . . ,” says Sir Otto Niemeyer,15 “you can go to war with it.” If the reserve is abroad, it may be seized by enemy countries in time of war, or it may suffer loss by the breakdown of the currency of the depository country as a result of war or other causes. Many gold-exchange standard countries suffered losses when England went off the gold standard in 1931.

4. Effect on Public Confidence of Gold Imports and Exports. Still another alleged weakness of the gold-exchange standard, as compared with the gold-coin standard, is psychological. There is a public awareness of gold exports and gold imports. In the market the influence of gold exports is “bearish” and that of gold imports is “bullish.” Excessive gold exports weaken public confidence in the currency and lead to the hoarding of gold. These facts serve as checks again,st dangerous monetary and fiscal tendencies.

When however, monetary adjustments are made, not by gold shipments, but by the purchase and sale of drafts at the gold points—something in which the general public has very little interest—these useful checks disappear. It is easier for the monetary authorities to take dangerous liberties with a gold-exchange standard than with a gold-coin standard.

The gold-exchange standard obviously has some decided merits, of which economy is the most important. It also has its shortcomings. The question of its future will be considered later.16

THE GOLD-BULLION STANDARD

Although gold in such unspecialized forms as dust, nuggets, bars, and the like, has been used as standard money for thousands of years, and although under the gold standard itself gold bars have been extensively employed in bank reserves and in making international payments, a formally and legally organized gold-bullion standard is an institution of comparatively recent development.17 After the First World War, most countries returning to the gold standard adopted a gold-exchange standard, a gold-bullion standard, or a combination of the two.

Under a gold-bullion standard no national gold coins are minted or circulated. The monetary unit consists of a fixed weight of gold, as in the gold-coin and the gold-exchange standards, but it is not coined. Gold reserves are held in the form of standard gold bars, mostly of large denominations, and the national currency is usually convertible into these bars on demand, The hoarding of gold is kept at a minimum, because the value of a gold bar is too great to make it easily available to the masses of the people.18

Aside from these differences, the fundamental principles under which the gold-bullion standard functions are the same as for the gold-coin standard and approximately the same as for the gold-exchange standard.

It is obviously easier, however, for a government to debase its monetary unit under a gold-bullion standard or a gold-exchange standard than under a gold-coin standard. This may be an important consideration for several reasons. (1) The masses of the people are not so much aware of a suspension of gold payments. (2) They have not in their power, through the privilege of ready redemption, the ability continually to bring pressure against inflationary trends. (3) Suspension of gold payment is easier for a government or a central bank to carry through if it merely means a raising of the price of gold bullion or of gold drafts, than if it involves such vigorous action as the driving out of circulation and the outlawing of all the country’s gold coins, as, for example, was done in the United States in 1933.

In the gold standard of the future the gold-bullion standard will probably play an important role.19

SELECTED BIBLIOGRAPHY

ARNDT, E. H. D.: Banking and Currency Development in South Africa (1652-1927), Juta & Co., Ltd., Cape Town, 1928.

Bank for International Settlements: The Gold Exchange Standard, a mimeographed manuscript, C.B. 60 Basle: B.I.S., 1932.

BROWN, WILLIAM ADAMS, JR. : The International Gold Standard Reinterpreted, 1914-1934, 2 vols., National Bureau of Economic Research, Inc., New York, 1940.

Commission on International Exchange: Stability of International Trade, Government Printing Office, Washington, D.C., 1903.

———: Report on the Introduction of the Gold-exchange Standard, Government Printing Office, Washington, D.C., 1904.

CONANT, CHARLES A.: The Gold-exchange Standard in the Light of Experience, Economic Journal, vol. XIX (1909).

Economic Essays in Honour of Gustav Cassel, George Allen & Unwin, Ltd., London, 1933.

Fowler Committee, Indian Currency Committee of 1898: Report of the Committee Appointed to Inquire into the Indian Currency, with Minutes of Evidence and Appendices, Eyre & Spottiswoode, London, 1890.

Genoa Conference: Papers Relating to International Economic Conference, Genoa, April-May, 1922, His Majesty’s Stationery Office, London, 1924.

KEMMERER, EDWIN WALTER: Modern Currency Reforms (with Bibliography), The Macmillan Company, New York, 1916.

———: The Establishment of the Gold-exchange Standard in

the Philippines, Quarterly Journal of Economics, vol. XIX (1912).

———: A Gold Standard for the Straits Settlements, I and II,

Political Science Quarterly, vol. XIX (1904) and vol. XXI (1906).

KEYNES, LORD JOHN MAYNARD: Indian Currency and Finance, Macmillan & Company, Ltd., London, 1913.

LINDSAY, A. M.: Ricardo’s Exchange Remedy, Effingham Wilson and Co., London, 1892.

———: See Fowler Committee.

PROBYN, L. C: Indian Coinage and Currency, Effingham Wilson & Co., London, 1897.

———: See Fowler Committee.

Royal Commission on Indian Finance and Currency: Final and Interim Reports, with Minutes of Evidence and Appendices, Eyre & Spottiswoode, London, 1913.

———: Report, Minutes of Evidence and Appendices, 3 vols.,

His Majesty’s Stationery Office, London, 1926.

Royal Institute of International Affairs: The International Gold Problem, Oxford University Press, London, 1931.

 

 

20 See, for example, the currency plan for British colonies and dependencies outlined in a Treasury Minute of February 11, 1825, which is described by E. H. D. Arndt, in his Banking and Currency Development in South Africa, p.45.

21 For references to Lindsay’s early writings on the subject and a summary of his plan, see Edwin Walter Kemmerer’s Modern Currency Reforms, pp. 79-92. For Lindsay’s elaboration and defense of the plan, see Fowler Committee, Report, Evidence, Questions, 3275-4303.

22 Kemmerer, op. cit., pp. 100-108.

23 The following description is a revision and abridgement of the author’s article on the Gold-exchange Standard in Economic Essays in Honour of Gustav Cassel, pp. 311-326.

24 For a more detailed account of this system see Kemmerer, Modern Currency Reforms, pp. 317-323.

25 The fund in the United States was kept largely in one or two New York City banks.

26 For a further discussion of this subject, see Kemmerer, Money, pp. 136-140.

27 KEYNES, LORD JOHN MAYNARD, Indian Currency and Finance, p. 36

28 Genoa Conference, Papers Relating to International Economic Conference, Genoa, April-May, 1922.

29 Ibid., pp. 60-63.

30 Bank for International Settlements, The Gold Exchange Standard, Annex Ia,

31 Kemmerer, in Economic Essays in Honour of Gustav Cassel, pp. 321-323.

32 See Bank for International Settlements, op. cit., pp. 18 and 19.

33 In some cases of revolution, however, the reserve has proved to be safer abroad than at home.

34 See, The International Gold Problem, p. 91.

35 See pp. 209-222.

36 As early as 1886 a gold-bullion standard was recommended for India by-Lesley C. Probyn. The recommendation was repeated several times, with revisions of the plan, and was finally presented by Mr. Probyn in detail in his testimony before the Fowler Committee in 1898. See Fowler Committee, op. cit., also, Kemmerer, Modern Currency Reforms, pp. 77-79,

37 Of course, large bars may be cut up into small pieces by private individuals and sold to the public as merchandise, and this is done, to some extent. No gold is used in the form of coins for hand-to-hand circulation. The gold-bullion standard is, therefore, much more economical in its use of gold than is the gold-coin standard, although it is less economical than the gold-exchange standard.

38 See pp. 211-212.

• 1For a brief discussion of the origin, nature, and definition of money, see Edwin Walter Kemmerer, Money, pp. 3-16.
• 2“If a man have destroyed the eye of a freedman, or have broken the bone of a freedman, he shall pay one mina of silver” (§198). “If a doctor have operated . . . he shall receive ten shekels of silver” (§215). “The wage of an artisan . . . five Sĕ of silver, of a brickmaker . . . five Sĕ.. . . ”(§274).
• 3Cf. RIDGEWAY, WILLIAM, The Origin of Metallic Currency and Weight Standards, pp. 57-58.
• 4obviously, it is impracticable in a book such as this to do more than to touch briefly on the more elementary facts and principles. Where important controversial questions are involved, the best we can do is to follow a highly responsible recent authority and to refer the reader to the selected bibliography at the end of the chapter, in which a number of the principal studies (some of them containing extensive bibliographies) are cited.
• 5DUBBERSTEIN, W. H., Comparative Prices in Later Babylonia, American Journal of Semitic Languages and Literatures, January, 1939, pp. 20ff.
• 6Like the names of many other monetary units of later times (i.e., pound, peso, lira), the mina and the shekel were originally concepts of weight. The mina was an ancient Babylonian unit of weight, and shekel (Hebrew, shegal) meant “to weigh” and equaled of a mina.
• 7Pictures of a number of these very early coins, including one of a gold coin of Croesus, are given by William Atherton DuPuy in The Geography of Money, The National Geographic Magazine, December, 1927, pp. 744-768.
• 8RIDGE WAY, op. cit., pp. 204-205.
• 9BURNS, op. cit., p. 160.
• 10BURNS, A. R., Money and Monetary Policy in Early Times p. 157.
• 11The principle of Gresham’s law appears to have been known in ancient Greece. Aristophanes, writing about 405 B.C., said in Frogs, “In our Republic bad citizens are preferred to good. Just as bad money circulates while good money disappears.” For a brief explanation of Gresham’s law, see pp. 135-136, note.
• 12The history of the Roman as is both intriguing and controversial. Concerning it there is a voluminous literature.
• 13RIDGEWAY, op. cit., p. 339.
• 14GAIUS PLINIUS SECUNDUS, Historia Naturalis, Bk. XXXIII, 3.13.
• 15Cf. pp. 128-130.
• 16It is interesting to note that our word money has its origin in early Roman times. Money then was coined in a temple of Juno on Capitoline Hill in Rome. One of Juno’s many names was Moneta, a word cognate with Latin monete (to warn). Moneta was guardian of finances (as well as the protector of the female sex). Our words money and mint are cognate with Moneta.
• 17The Roman pound contained 12 ounces and the ounce was divided into 24 scruples. It is usually equated with 5,057 grains Troy. See Louis C. West, Gold and Silver Coin Standards in the Roman Empire, Numismatic Notes and Monographs, No. 4 (1941), pp. 6 and 34.
• 18MATTINGLY, HAROLD, The First Age of Roman Coinage, Journal of Roman Studies, Vol. 19, pp. 20 and 23.
• 19Ibid., p. 17.
• 20The gold standard in its “orthodox form” is a product of the nineteenth century. Its roots, however, go deep into the past. This chapter will explore briefly this early history of gold as money, i.e., as a commonly accepted medium of exchange.
• 21The earliest references I have been able to find in recorded history to the use of one of the precious metals as a medium of exchange—in these cases, passing by weight—are in the Code of Hammurabi, King of Babylon. They refer to silver in about the year 1870 B.C.
• 22Gold, by reason of its beauty, its world-wide distribution, the facility with which it could be obtained from the streams by crude methods of “panning,” and the ease with which it could be “worked,” probably had a wider use as a medium of exchange in very ancient times, and among primitive peoples in modern times, than any other metal.
• 23Thanks to the careful studies made by classical scholars over many generations, we know today much more about the money of classical times than the ancients knew. There are, however, many gaps in the chronology of the coins that have come down to us, and the story that these coins tell is far from complete. It is still full of controversial questions concerning which the modern literature is voluminous, but progress in their solution is being, made continually.
• 24Coinage was originally of the nature of a seal or hallmark punched on a nugget of metal as a guarantee of its quality or its weight. The beginnings of coinage appear to have been made in the countries of the eastern Mediterranean early in the eighth century B.C. Sennacherib, King of Assyria (705-681 B.C.), said, “I built a form of clay and poured bronze into it as in making half-shekel pieces.”
• 25The earliest references I have been able to find in recorded history to the use of one of the precious metals as a medium of exchange—in these cases, passing by weight—are in the Code of Hammurabi, King of Babylon. They refer to silver in about the year 1870 B.C.
• 26I have in my possession a gold daric, one of the oldest and most famous gold coins in history. It is made of almost pure gold and is about the weight of our late American $5 gold piece. It looks like a roughly molded gold nugget and bears a crude stamp of an archer with his bow and spear. The coin was made during the reign of Darius the Great of Persia, about 500 years before Christ. Only about two generations before this, in the reign of Croesus, which began 561 B.C., there circulated in Asia Minor the coins of which Herodotus said, “The Lydians were the first people, so far as I know, to adopt a gold and silver coinage.”
• 27Many of the early coins were made of electrum—a natural alloy, consisting of about three parts of gold to one part of silver, which was found abundantly in Lydia and which caused that country to be known as the land of gold. Because of the difficulty in separating the gold from the silver, the ancients regarded electrum almost as a distinct metal. Early coins of pure gold in Asia Minor were probably made from placer gold obtained from the valley of the Oxus or from the Ural Mountains. The electrum coins were ancient examples of what in modern times is called symmetallism.
• 28The first gold coin to circulate in Hellas proper was the aforementioned Persian daric or stater (meaning “to weigh”), which weighed about 130 grains and which enjoyed an extensive circulation for several centuries. It was never debased and was “practically the only gold coin for about 200 years, as well in Asia Minor and the mainland of Greece as in the Persian Empire.” It was known in Palestine during Biblical times.
• 29In those early times, gold coins and silver coins circulated for several centuries under a dual standard. Gold gained in importance at the time of Alexander the Great, under the stimulus furnished by the large amount of gold produced in his Pangean mines.
• 30In the Greek world there were, on occasions, official ratings of the coins of one metal in terms of those of the others. Ratings were changed from time to time and recoinages were made, to prevent a cheaper or overrated metal from driving out of circulation a dearer or underrated one, under the force of what we now call Gresham’s law.
• 31Bronze Money. In Italy, as elsewhere, one of the first forms of metallic money consisted of unstamped bullion. But here, unlike the situation in some other places, where gold was readily available, the first metal to circulate was bronze. Originally, the bronze circulated in the form of a rough lump (aes rude), the lumps varying in weight, shape, and size, and bearing no stamp. Later it was hammered into the form of a bar, known as an as (meaning “unit”) in order to give it a convenient form for bartering the metal, which was in demand for the making of tools, weapons, and utensils. As time went on, the conventional length of this bar became a foot (the length of a man’s foot), which, with the conventional diameter, gave the bar a convenient weight of about 1 pound. The bar was later marked off into 12 thumbs, or inches. Since these bars (asses) varied considerably in weight, the custom gradually developed of passing them by weight instead of by tale. The weight of metal then became the important consideration, and the unit of value became the pound of bronze, the as libralis, while the 12 thumb divisions, or inches, became 12 ounces.
• 32Early in the fourth century B.C., the silver coinage of Rhodes was supplemented by an issue of gold staters, and this double issue of gold and silver continued unbroken until after the death of Alexander the Great in 323 B.C.
• 33Weighing bronze was, however, inconvenient, and the practice developed toward the close of the regal period of placing upon the asses an authoritative stamp certifying their weight, so that again they could pass by count. There are early records of 2-pound bars and also of bars of ½ and ¼ pound. The earliest coin marks on the bars that we have preserved are crude drawings of animals. According to Pliny, “King Servius first stamped bronze.. . . It was stamped with the impressions of animals, whence it was termed pecunia ...”
• 34About the beginning of the fourth century B.C., we find a case of monetary debasement suggestive of our American debasement of 1933 to 1934. Dionysius, Tyrant of Syracuse, who had borrowed heavily from his citizens and was being hard pressed for repayment, directed that all the coins in the city should be brought to him, under penalty of death. He then restamped the coins and gave to each drachma the value of two drachmas. By this debasement he was enabled to pay off the original loan and, at the same time, repay the money that he had ordered to be brought to the mint.
• 35Long after the as libralis ceased to circulate, it was used as a unit of account, in terms of which people thought and expressed monetary values even when payments were actually made in the standard silver money. In contracts then it appears to have been called the as grave, to distinguish it from the current as.
• 36Bronze Money. In Italy, as elsewhere, one of the first forms of metallic money consisted of unstamped bullion. But here, unlike the situation in some other places, where gold was readily available, the first metal to circulate was bronze. Originally, the bronze circulated in the form of a rough lump (aes rude), the lumps varying in weight, shape, and size, and bearing no stamp. Later it was hammered into the form of a bar, known as an as (meaning “unit”) in order to give it a convenient form for bartering the metal, which was in demand for the making of tools, weapons, and utensils. As time went on, the conventional length of this bar became a foot (the length of a man’s foot), which, with the conventional diameter, gave the bar a convenient weight of about 1 pound. The bar was later marked off into 12 thumbs, or inches. Since these bars (asses) varied considerably in weight, the custom gradually developed of passing them by weight instead of by tale. The weight of metal then became the important consideration, and the unit of value became the pound of bronze, the as libralis, while the 12 thumb divisions, or inches, became 12 ounces.
• 37Silver Money. Silver in the form of ingots and of foreign coins, notably those of the Greeks, Etruscans, and Sicilians, circulated in Italy during part of the bronze-standard period just described. According to Mattingly, the aes grave of Rome and Italy, which we have previously mentioned, represented “only a short stage of transition from the early use of uncoined bronze as a measure of value, to the Greek use of silver money . . . ” Rome, learning the use of silver and of token bronze from the Greeks of southern Italy, was led to give at least the form of a coinage to the bronze that she was accustomed to use for trading with the Italian peoples.
• 38In the year 217 B.C. the as was reduced to a standard of 1 ounce and was retariffed at the rate of 16 instead of 10 to the denarius, while the denarius itself was debased. About the beginning of the second century B.C., “the Roman coinage enters on a long period of quiet and orderly movement with little of external change to mark it.” This situation continued during the early centuries of the Empire, during which, however, silver met increasing competition from gold. The yellow metal finally superseded silver as the dominant standard, just as silver had previously superseded bronze. To this story we shall now turn.