The Classical Gold Standard

Under the gold standard, a country defined its currency as a fixed weight of gold and promised to exchange notes for gold on demand. Britain effectively adopted it in the eighteenth century and formally from 1821, and between about 1870 and 1914 most major economies followed, including Germany in the early 1870s and the United States, formally, in 1900. Because each currency was tied to gold, exchange rates between them were fixed, which encouraged trade and long-term investment across borders.

The system was also meant to be self-correcting: countries losing gold through deficits saw their money supply shrink and prices fall until exports recovered. But adjustment through falling prices and wages could be painful, and money supply growth depended on gold discoveries rather than economic needs. In the United States, farmers squeezed by falling prices supported silver coinage, culminating in William Jennings Bryan's 1896 'Cross of Gold' speech. The system broke down when the First World War began.