A week ago, we tackled the issue of massive money spoilage in Europe in the 18th century. The full text can be found here. Just as day comes after night, so after this period, efforts were made to save currencies. The so-called Gold Standard system.
The Gold Standard debuted as an idea in Great Britain. However, it is difficult to talk about a “debut”, because de facto it was a creative development of an idea based on the receipts issued by jewelers mentioned in previous articles of this cycle, when they accepted gold as a deposit. Ultimately, someone thought that new money could be paper, but which would actually be a representation of real gold, which in turn is in the central bank.
Less wealthy countries slightly modified the idea of the United Kingdom and introduced bimetalism. Their currencies were covered in gold and silver at the same time. As part of this, the Latin Monetary Union was founded. Ultimately, however, Gold Standard turned out to be the best solution and at the beginning of the 20th century it was binding almost all over the world. Its operation ended only after World War I, but we will deal with it in a moment.
Only Asian countries have emerged from the Gold Standard system: China, British India and French Indochina. There, silver was used as the foundation for the currencies.
How did the Gold System work?
The international gold standard had several advantages. First of all, he limited the monetary experiments of politicians. Economist David Hume made it quite clear. Suppose, for example, that a country that is not very responsible begins to issue banknotes in excess. Effect? we have inflation, so prices are rising. This stimulates imports, because it turns out that it is better to buy foreign goods than to pay for domestic ones. In addition, the jump in domestic product prices hits exports. So we have disturbed international trade. We import more to our country than we sell to neighbors. There is also a balance of payments deficit. Suddenly it turns out that foreign customers are starting to exchange our currency for gold. This may result in the outflow of bullion from our treasury. Even the most overbearing satrap cannot do that in the long run. As a result, inflation policy should be reduced. The result is the opposite situation. Now we sell more abroad, recover gold, etc. The cycle is repeated and the market regulates this rather complicated process almost alone.
Latin Monetary Union
The aforementioned Latin Monetary Union included: Belgium, France, Switzerland and Italy. A few years after its foundation, Greece and informally Romania, Spain, Finland, Serbia and Bulgaria joined the union (they were not members but accepted the rules of its operation).
Bimetalism was used as part of the union. In practice, this has forced Member States to mint certain standard coins. Characteristic silver five- and two-bank coins were issued.
However, the Union has not been well thought out. Banknotes proved to be the Achilles heel. In 1866, Italy suspended the convertibility of its “bank notes” into bullion. This took place during the war, but after its end exchangeability was no longer restored. Remember that politicians rarely withdraw from the laws that are favorable to them and introduce them during crises …
Unfortunately, the above trend strengthened. In 1870 – also during the war – France did the same. Finally, in 1878, the union collapsed.
Scandinavian Monetary Union
In the north of Europe, the Scandinavian Monetary Union was founded. It was founded by Sweden and Denmark. After three years, Norway joined them. Here the basic unit was a golden crown. This system worked even more efficiently than the Latin Monetary Union, but it collapsed after World War I.
World War I
We are slowly coming to the most tragic event of the beginning of the last century. I am talking about World War I, then still known as the Great War (hardly anyone thought that the world would be overtime in the form of World War II and only two decades after the end of the first).
The conflict turned out to be the end of the Gold Standard. Why? To understand this, we must understand the genesis of this terrible global conflict.
First, in 1914, the outbreak of the war was quite unexpected. He was so-called the black swan. And this despite the fact that relations between the powers have become inflamed for several years and the conflict could have theoretically occurred much earlier. The attack in Sarajevo was only the official reason – let’s add that it is definitely not obvious, and even quite … stupid.
In the background, however, rivalry between the German Reich and Great Britain continued for several decades. It was about primacy in Europe, but also about conquering colonies outside of it. Germany was intensively developing economically and needed more and more “Your place under the sun.”
Despite the above, they were counting on a short war – maybe something like the conflict between Germany and France in 1870. Citizens also reacted to the outbreak with great joy. In the books and on the web, you can find, for example, a photo of an enthusiastic crowd who is happy with the start of the war, which shows … young Adolf Hitler. Young people were counting on a war adventure – a short game from which the lucky ones would return home with a noble, flashy scar on their cheeks.
The golden age is coming to an end
It turned out that the Great War lasted four years and turned not into a blitzkrieg, but into bloody positional fights. In the background, destruction of the economy and currencies continued.
War costs a lot, but world war already costs a fortune. Therefore, the countries have accused Gold Standard. In other words, they started printing money without thinking and without worrying about the fact that they no longer have gold coverage.
In Great Britain, government issued along with Bank of England banknotes currency notes – something like a second currency in circulation with low denominations (1 and 0.5 pounds). In Germany, they appeared in turn reichskassenscheiny, but also local currencies. Tsarist Russia bet on cash tickets (the lowest denominations were in fact converted into “banknotes” … postage stamps).
The suspension of convertibility for gold had another reason. Countries were afraid that its maintenance would lead to theft of metal by other countries, as it was centuries ago.
However, while during the war nothing bad was happening (at least for the citizens), because governments introduced statutory price restrictions, so after the end of hostilities there was a disaster. Almost the whole world has known a very bitter taste inflation and hyperinflation.
All this and other problems have come to this. The Entente countries had debts in the US, while the central countries indebted themselves to their citizens. Interestingly, for example, in 1918 Germany had debt at the level of approx. USD 17 billion, and Great Britain – as much as approx. USD 29 billion, while France – USD 24 billion. As you can see, Germany’s economic situation was better in this respect, so it is a paradox that it was the last country that lost the war, not the Entente. The worst was yet to come.