In the 19th century after the Napoleonic Wars, societies turned initially to gold, silver or bimetallic standards, and subsequently to the international gold standard, in order to effectively reduce the potential for run-away inflation. Throughout history, and with some notable episodes in the 18th century and around 1800 during periods when money was not tied tightly to gold or silver, governments or central banks often printed too much currency, increasing the money supply too fast—reducing the effective value of the currency. By tying paper currency to gold, society linked the ability of a central bank to print money to the amount of gold that it had in its possession or to a multiple thereof. This provided tremendous confidence in the currency as citizens knew that at any point they could redeem their paper currency for gold. Thus the primary advantage that has been attributed to the gold standard is price stability - which provides the conditions for greater economic activity and broader financial stability. During the gold standard prices both rose and fell, but over the long-term they were broadly stable³ .There is also plenty of evidence that cross-border investment flows during the gold standard period were substantial⁴ .

Confidence that exchange rates would hold facilitated the substantial flows of direct investment which opened up the “emerging markets” of the era such as the Americas (including the US West), Australia, New Zealand, and South Africa. Global outflows of capital from the core European countries to countries of new settlement were massive during this era and far higher than during most of the 20th century. Only towards the end of the 20th century did international capital flows recover to comparable levels; arguably, today they are often less stable than during the gold standard period (witness the “Asian crisis” of 1997-98) and can be in the “wrong” direction from emerging markets to developed ones.

Indeed the period of the gold standard was a highly successful one for the world economy. World trade expanded and most countries benefited from relatively rapid growth and low instability. Experts debate to what extent the gold standard enabled this and to what extent it flourished because of these favourable conditions. Most probably causality flowed in both directions but it would be hard to deny that the gold standard at least helped to facilitate matters.

On the other hand, a major disadvantage of the gold standard was that it did not allow policy makers to stimulate the economy through a monetary stimulus —which is the foundation of modern day Keynesian economics. Furthermore, by tying a nation’s currency to gold, the money supply is instead tied to the global stock of monetary gold, growth in which varies, in particular, with the pace of new mine supply. Thus large discoveries of gold can have the effect of creating a monetary stimulus—which might not be appropriate at that particular time. Conversely, lower growth in gold output during a particular period can limit the expansion of the monetary base, restraining economic growth. Following the Californian and Australian gold discoveries of the late 1840s and the 1850s, there was rapid growth in mine production which first levelled off and then fell back in the 1870s and 1880s before surging again with the South African and Klondike discoveries of the 1890s, allied to improved production techniques.

Further, while the overall picture is one of rising prosperity, there were times of hardship in all countries. The gold standard was famously blamed for economic problems in the US – discontent culminating in William Jennings Bryan’s famous “cross of gold” speech in the 1896 presidential election campaign⁵. Nevertheless it is not just under a gold standard that tensions occur between the desire or need to maintain a fixed exchange rate and the desire to mitigate its adverse impacts on the domestic economy. The history of currency boards and, indeed, the Eurozone crisis of 2010-11 are other examples.

³See, for example:. Money, Inflation and Output under Fiat and Commodity Standards, Arthur J Rolnick and Warren E. Weber, Federal Reserve Bank of Minneapolis Quarterly Review, Vol 22, No 2, Spring 1998; or Gold as a Commitment Mechanism: Past, Present and Future, Michael D. Bordo, World Gold Council Research Study no. 11, December 1995.
⁴The evidence is summarised and discussed in a paper by Michael D Bordo, The Globalization of International Financial Markets: What Can History Teach Us, 2000
⁵The speech, which advocated a return to bimetallism and famously ended with the words, “you shall not crucify mankind upon a cross of gold” was given at the Democratic Convention. Bryan secured the Democratic nomination for the presidency but lost to William McKinley.