The Gold Standard
When we study pre-1914 monetary history, we find ourselves
frequently reflecting on how similar were the issues of monetary
policy then at stake to those of our time.
(Marcello de Cecco, Money and Empire)
Many readers will imagine that an international monetary system is a set of arrangements negotiated by officials and experts at a summit conference. The Bretton Woods Agreement to manage exchange rates and balances of payments, which emerged from such a meeting at the Mount Washington Hotel at Bretton Woods, New Hampshire, in 1944, might be taken to epitomize the process. In fact, monetary arrangements established by international negotiation are the exception, not the rule. More commonly, such arrangements have arisen spontaneously out of the individual choices of countries constrained by the prior decisions of their neighbors and, more generally, by the inheritance of history.
The emergence of the classical gold standard before World War I reflected such a process. The gold standard evolved out of the variety of commoditymoney standards that emerged before the development of paper money and fractional reserve banking. Its development was one of the great monetary accidents of modern times. It owed much to Great Britain's accidental adoption of a de facto gold standard in 1717, when Sir Isaac Newton, as master of the mint, set too low a gold price for silver, inadvertently causing all but very worn and clipped silver coin to disappear from circulation. With Britain's industrial revolution and its emergence in the nineteenth century as the world's leading financial and commercial power, Britain's monetary practices became an increasingly logical and attractive alternative to silver-based money for countries seeking to trade with and borrow from the British Isles. Out of these autonomous decisions of national governments an international system of fixed exchange rates was born.