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We're
continuing our series of investigations on what a gold standard looked like,
in real life, during the 1700-1971 period.
January 16, 2011: The Composition of U.S.
Currency
January 9, 2011: The "Money Supply" With a Gold Standard
2: 1880-1970
January 2, 2011: The "Money Supply" With a Gold Standard
I
went off to the library to find info on the Bank of England, which maintained
a gold standard from 1698 to 1914 at a single parity (with a big lapse in
1797-1821). Unfortunately, thus far I was only able to find info for the
years 1778-1844. Here it
is:
 
Here's what it looks like. Unlike the U.S. example, where there were
literally thousands of banks issuing banknotes, in Britain the Bank of
England had a monopoly on banknote issuance. So, this represents the entire
paper currency circulation. Once again, you can see a few things here:
1) There was never any "100% reserve." The "reserve
ratio" (bullion to banknotes ratio) varies wildly during this time.
2) Banknotes outstanding did not follow any "2% per year" curve
related to gold mining, etc.
3) I don't have info on imports and exports of gold here, or "current
accounts" data, but if I did you would see that there is no relation
there either.
Here's a description of the floating of the pound in the years 1797-1821,
showing the price of gold in pounds, and the implied devaluation of the
currency in percent. (Yes, this is exactly how people thought of it in those
days. Which is exactly the same way as I think of it today.)
April 15, 2007: The Value of Today's Dollars in 1854 Dollars
As
you can imagine, there was a lot of discussion about how to put the pound
back on the gold standard. David Ricardo, a retired financial speculator,
began to write about this topic. He was later regarded as one of the greatest
economists of the 19th century. Here is his first 1807 pamphlet, The High
Price of Bullion, Proof of the Depreciation of Banknotes.
The High Price of Bullion, Proof of the
Depreciation of Banknotes
Particularly after Napoleon's defeat at Waterloo in 1815, which ended the
Napoleonic Wars, an effort was made to return the pound back to its prewar
parity at £3 17s 10.5d. (That's three pounds, seventeen shillings, 10.5
pence. There were twenty shillings to a pound, and twelve pence to a
shilling.)
You can see a few results of this decision. After a rather brisk expansion in
banknotes outstanding, beginning in 1815, the amount becomes stable around
£27 million. Then, it starts a decline to £18 million in 1822.
This of course was the mechanism by which the pound's value was raised back
to its prewar parity. During this period, the gold bullion holdings are all
over the map, from £2 million in 1815 to £10 million in 1818,
back down to £4 million in 1819, up to almost £12 million in
1821, and down to £2.5 million in 1826. Do you see what I mean when I
say that the amount of gold held is actually irrelevant? It's the banknotes
outstanding, in relation to the demand for banknotes, that determines the
value of the banknote.
Here's David Ricardo on
the topic:
It
is on this principle that paper money circulates: the whole charge for paper
money may be considered as seignorage. Though it has no intrinsic value, yet,
by limiting its quantity, its value in exchange is as great as an equal
denomination of [gold] coin, or of bullion in that coin ...
It will be seen that it is not necessary that paper money should be payable
in specie to secure its value; it is only necessary that its quantity should
be regulated according to the value of the metal which is declared to be the
standard.
Principles of Political Economy and Taxation, 1821
Nathan
Lewis
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