by Among those who support the end of government fiat money, it’s not uncommon to hear and see claims that gold is “the best money” or “natural money” or the only substance that’s really suited to be commodity money. In many of these cases, when they say “gold” they mean gold, and not silver, platinum, or any other precious metal. Naturally, one can expect to encounter these claims among those who have made a living out of promoting gold and gold-related investments for commercial purposes. For example, consider Nathan Lewis’s 2020 article at Forbes titled “Gold Has Always Been the Best Money.” Lewis contends that gold and not silver is obviously the best money and that its adoption as the metal behind the nineteenth-century gold standard was more or less inevitable
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Among those who support the end of government fiat money, it’s not uncommon to hear and see claims that gold is “the best money” or “natural money” or the only substance that’s really suited to be commodity money. In many of these cases, when they say “gold” they mean gold, and not silver, platinum, or any other precious metal.
Naturally, one can expect to encounter these claims among those who have made a living out of promoting gold and gold-related investments for commercial purposes.
For example, consider Nathan Lewis’s 2020 article at Forbes titled “Gold Has Always Been the Best Money.” Lewis contends that gold and not silver is obviously the best money and that its adoption as the metal behind the nineteenth-century gold standard was more or less inevitable and based on the alleged intrinsic superiority of gold as money. He writes:
In the late 19th century, a final decision had to be made between gold and silver. People chose gold; and silver, which had for thousands of years traded in a stable ratio with gold, lost its monetary quality and became volatile.
Lewis presents this as an event that was as natural as people choosing to ride in automobiles rather than on the backs of donkeys. Choosing gold over silver is progress, just like getting rid of the horse and buggy!
Lewis insists that “a final decision had to be made” between gold and silver and that “people” chose gold.
This leaves a lot unsaid, to say the least. Why, exactly, did this decision have to be made? Couldn’t both metals serve as money? Moreover, who made this decision? Lewis says it was “people” who made the decision. Which people?
As we will see, this narrative around gold’s inevitability as the dominant metallic money in the nineteenth century is an unfounded one. Gold’s preeminence was never inevitable, inexorable, or based on some sort of natural law of money. Rather, the rise of gold resulted from a number of historical events peculiar to a certain time and place. These include geopolitical issues, increasing global gold supply, political efforts to increase foreign trade, and the fixed exchange ratio between gold and silver. In other words, the marketplace was not necessarily the driving factor behind the turn to gold.
Had it not been for this government meddling designed to control gold and the “gold standard,” we might still be living in a world of true currency competition today—a world of competition between gold, silver, and anything else that market actors might find to be useful as a general means of exchange.
A Long History of Silver Money
The history of metallic money is largely a history of silver money.
Going into the distant past, of course, we find that silver coins were in continual use from the ancient world well into the nineteenth century. Gold coins were indeed used as stores of value and as money, but silver coins were the coins most often used because silver coins were more numerous and appropriate for ordinary daily transactions than were gold coins. (Copper coins, of course, were also used for small transactions.)
Regimes certainly considered silver to be of strategic importance, and in the late thirteenth century, the crown and parliament in England “together banned the export of silver bullion (including foreign silver coin) and plate from December 1278.”1 This was a convenient way to prevent incoming foreign silver coins—which were numerous and in widespread use in France—from leaving England again.
It is also noteworthy that when the wealthy Republic of Venice in the twelfth century obtained one of the world’s first government loans secured by tax revenues, the loan was denoted in “silver marci.”2
In the sixteenth century, Antwerp rose to become a financial center, as it facilitated markets where “German copper and silver was traded for the spices that the Portuguese explorers brought back from India.”3
Trade with the East, meanwhile, continued in silver, as the Chinese and Japanese had long preferred silver in exchange for the goods of the East.4
The use of silver was also facilitated by increasing abundance and a growing need for easy-to-use silver coinage. Silver mines were expanded in central Europe by the wealthy Fugger family of Augsburg in the early sixteenth century.5 But of greater importance were “massive imports of silver from Peru and Mexico in the 1550s and 1560s.”6 A new silver mine was discovered in 1545 in Potosí (today in Bolivia but then in Peru). This was followed by new discoveries in Mexico, where, as Luis Amadeo Hernandez notes,
A major new infusion of America silver began in 1548 with the discovery of the silver mines at Zacatecas, in Mexico. This new silver had a profound impact on the world economy beginning in 1600 in various trade spots in Asia.7
During the sixteenth century, European merchants and bankers engaged in a boisterous market of currency exchange and competition where money could be made on the arbitrage between regional preferences for either gold or silver. The de facto preference for silver continued for centuries, and, as Hernandez concludes, silver’s abundance—and, thus, relatively low price—made it the money of regular commerce:
Until the dawn of the nineteenth century there was at least a tri-metallic world market, however, the predominant was a de facto silver standard. The more rapidly increasing world supply of silver, and its concomitant decline in its relative price to gold and copper, induced and permitted the silver standard increasingly to impose itself in the world market economy.8
Britain Embraces a Gold Standard
So what happened to bring this to an end?
An important first step is found in early efforts to create national currencies defined as amounts of gold and silver. Murray N. Rothbard explains why this occurred:
he free market established [in the past] “parallel standards” of gold and silver, each freely fluctuating in relation to the other in accordance with market supplies and demands. But governments decided they would help out the market by stepping in to “simplify” matters. How much clearer things would be, they felt, if gold and silver were fixed at a definite ratio, say, twenty ounces of silver to one ounce of gold! Then, both moneys could always circulate at a fixed ratio—and, far more importantly, the government could finally rid itself of the burden of treating money by weight instead of by tale. Let us imagine a unit, the “rur,” defined by Ruritanians as 1/20 of an ounce of gold. We have seen how vital it is for the government to induce the public to regard the “rur” as an abstract unit of its own right, only loosely connected to gold. What better way of doing this than to fix the gold/silver ratio? Then, “rur” becomes not only 1/20 ounce of gold, but also one ounce of silver. The precise meaning of the word “rur”—a name for gold weight—is now lost, and people begin to think of the “rur” as something tangible in its own right, somehow set by the government, for good and efficient purposes, as equal to certain weights of both gold and silver.9
It was in this environment of fixed exchange ratios between gold and silver that an important second step toward the gold standard occurred. This was the accidental imposition of a gold standard in Britain in the eighteenth century. As David Glasner explains, the British state
[f]ixed the legal value of the gold guinea at 21.5 [silver] shillings. At this rate [thanks to a fixed gold-silver ratio] gold was overvalued, so that gold began flowing into England from abroad. Even after Sir Isaac Newton, master of the Mint, effected a new currency reform in 1717, which reduced the value of the gold guinea to 21 silver shillings, the implied mint ratio of silver to gold of 15.21 to 1 still slightly overvalued gold. Although it was not intended to do so, Newton reform confirmed a de facto gold standard in Britain.10
Meanwhile, new gold finds in Africa further enabled the mercantilist British state to hoard gold. And, with most of the world on a silver standard, Britain’s trading partners in northern Europe were happy to exchange their gold for the British silver that continued to flow to the Continent. Eventually, the British government discontinued free silver coinage in 1798 and adopted an exclusive de jure gold standard with 1816’s Coinage Act. Moreover, after nearly a century of a de facto gold standard, a status quo bias began to favor a continued gold standard in the United Kingdom even as market realities changed.
There were other practical factors that further encouraged the regime to stay on a monometallic gold standard, as well. The adoption of the gold standard made it easier for the British state to address the nation’s coin shortage.11 A shortage of coins had long been a problem throughout much of Europe, especially as industrialization led to more wage work paid in cash. With the nation now on a gold standard, the British state could more easily use silver for token coins. That is, silver could be used for coins whose metallic value was less than the face value. In England, these “debased” silver coins would not drive gold out of circulation (in accordance with Gresham’s law) because silver had been demonetized.12
This proved to be popular. Although there were some efforts at shifting to either bimetallism or a silver standard in the nineteenth century, these voices were increasingly powerless politically. Even the fear of gold devaluation in the marketplace that came with new gold discoveries in both California (in 1849) and Australia (in 1851)—due to increasing gold supply—was not enough to shift opinion against gold within Britain’s regime.
The importance of the British ideological embrace of gold can be seen in the fact that the Gold Rush in California had the opposite effect in much of Europe. The British state was determined to hold on to its gold—even if it looked like gold might lose ground against silver in terms of its market price. But many other regimes took steps to preserve their silver hordes instead. For example, governments in “Belgium and Switzerland introduc[ed] a silver franc and gold was demonetized in Naples, the Netherlands, Spain and India.”13 This was done to prevent outflows of silver that would presumably result from free coinage of the now more plentiful gold.
Why Did the Continent Embrace a Gold Standard?
At the middle of the nineteenth century, the gold standard in Europe was “unfashionable”—in the words of historian Ted Wilson. This would begin to change significantly by 1860, and by 1870, Western Europe had made a decisive turn toward gold.
The increasing importance of Britain as a global power and world-spanning trading partner played a big part in this. Governments and large merchants often preferred a monetary system that eased trade with their nation’s largest trading partners. Increased trade with Britain influenced efforts to move toward a gold standard and away from silver in northern Europe. In Germany, for example, economic ties to London prompted many interest groups—such as those in the financial and shipping sectors—to push for a gold standard. A similar story is found in other countries as well. In France, for instance—where silver had long been a preferred money for the central bank and for agricultural populations in the provinces—gold began to gain favor, especially in regions where trade ties with Britain were most important.
Yet there were many Europeans who were satisfied with bimetallism and saw no need for an exclusive embrace of gold. This varied by both region and economic sector. In both France and elsewhere, agricultural interests and small business owners suspected they would not benefit from the proposed change. Making the switch to gold became a matter of winning a political debate, and the outcome of this debate remained dubious for years. When the switch to gold came, the verdict was hardly unanimous.14
Many influential voices prevailed in pushing for gold, however. In 1867, at the International Monetary Conference in Paris, Western governments adopted the twenty-five-franc gold coin unit as the basis for an eventually global gold standard.15
This was easier said than done. Both France and Germany still relied heavily on silver in their bimetallic systems, and it was no easy matter to “retire” silver and replace it with gold. The silver would need to be converted into gold at something approximating the fixed 15.5-to-1 ratio, and that required a lot of gold. The French regime had enough gold to seriously contemplate this plan, but Germany was far more reliant on silver. It was unclear where the German state and banking system would get enough gold to demonetize silver.
According to Marc Flandreau, the key change came with the conclusion of the Franco-Prussian War. As stipulated by the Treaty of Frankfurt, France paid 5 billion francs to Germany after losing the war. This payment was in “international bills, most of them convertible into gold.”16 This suddenly changed the calculus in whether or not Germany could change over to a gold standard. Thanks to this new infusion of gold, Germany announced it was adopting the gold standard in 1871.
At this point, the realities of international trade were pushing France—which remained on a bimetallic standard—and many smaller countries toward money that would facilitate easier trade with Britain, Germany, and the growing “gold bloc” overall. By 1873, France, Belgium, Italy, and Switzerland had embraced a de facto gold standard which would be solidified in law in subsequent years.17
The Problem with Bimetallism
Moreover, the government-invented fixed gold-silver exchange ratio would prove to be a key political factor. When first imposing this ratio, governments had generally embraced the market ratio, which tended to hover around 15.5 to 1. But in the second half of the nineteenth century, this ratio less and less reflected market demand and market prices. This laid the foundation for the ultimate abandonment of both gold and silver as money. Rothbard explains that while the fixed ratio did accomplish the government’s goal of defining gold and silver in terms of national currencies,
[i]t did not, however, fulfill its other job of simplifying the nation’s currency. For, once again, Gresham’s Law came into prominence. The government usually set the bimetallic ratio originally (say, 20/1) at the going rate on the free market. But the market ratio, like all market prices, inevitably changes over time, as supply and demand conditions change. As changes occur, the fixed bimetallic ratio inevitably becomes obsolete.18
Europe and the Americas experienced volatile swings in both directions during the nineteenth century as either silver or gold was overvalued in accordance with changes in supply. This fixed-ratio-induced problem led to what Rothbard describes as the “calamitous effects of suddenly alternating metallic currencies.” Naturally, many voices in the public called for the regime to “solve” this problem which the regime had caused in the first place. Rothbard continues:
Bimetallism created an impossibly difficult situation, which the government could either meet by going back to full monetary freedom (parallel standards) or by picking one of the two metals as money (gold or silver standard). Full monetary freedom, after all this time, was considered absurd and quixotic; and so the gold standard was generally adopted.19
Thus, during the 1870s, Europe’s governments decided gold was to be the metal. This became apparent the next time the bimetallic pendulum swung—during the 1880s—and it was silver that was legally overvalued and thus would have pushed gold out of circulation given the fixed exchange ratio. But that’s not what happened. When silver supplies greatly increased in the 1880s, thanks to newly discovered in-ground sources in North America, Western governments still on a bimetallic standard rejected the established exchange ratio. Instead, these regimes chose to gradually prohibit free coinage of silver. As it became clear that silver was going to be demonetized, the demand for silver fell further, pushing up demand for gold even more. At this point, silver was all but dead as a monetary standard in the West.
There’s Nothing “Natural” about the Triumph of Gold
With the demise of silver, gold-supporting pundits and scholars immediately began to paint silver as somehow less civilized than gold and the gold standard as a sign of progress. The reality, however, is that the monometallic gold standard was a result of historical circumstances, interest-group pressures, and great-power politics. It was not an inherent part of some alleged march toward “progress” or “civilization.“
If “the people” chose gold as a sole metallic standard, it was because governments had created an untenable situation with fixed exchange ratios. Moreover, the embrace by regimes of either a gold standard or a silver standard over time had led to network effects in international trade that induced governments to embrace the same “standard” as their trading partners.
In all this, we find no natural law or market law that points to gold as the “best” money within an unhampered market. Instead we see the fingerprints of government intervention everywhere. All this moved the world ever more toward a system in which the world’s regimes gained even more control over defining, controlling, and manipulating currency. If a government could demonetize silver, it could demonetize gold as well. This is exactly what happened, of course, and it’s not a coincidence that the era of the state-imposed monometallic gold standard was followed by the era of Bretton Woods and fiat currencies.
- 1. John H. Munro, “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability,” International History Review 25, no. 3 (September 2003): 505–62, esp. 545.
- 2. Ibid., p. 514.
- 3. Jan Sytze Mosselaar, A Concise Financial History of Europe (Rotterdam: Robeco, 2018), p. 46.
- 4. Charles P. Kindleberger, “Economic and Financial Crises and Transformations in Sixteenth-Century Europe,” in Essays in History: Financial, Economic, Personal (Ann Arbor: University of Michigan Press, 1999), p. 3. Trading relations in the Far East had long been dominated by Chinese preferences for silver. Recognizing this, the US sought to convert its Philippines colony to a gold standard as part of a “diplomatic offensive” to expand the sphere of gold-based currencies with the intent of shifting Philippines trade linkages away from China and toward the United States. Willem G. Wolters, “From Silver Currency to the Gold Standard in the Philippine Islands,” Philippine Studies 51, no. 3 (2003): 375–404.
- 5. Kindleberger, “Economic and Financial Crises and Transformations in Sixteenth-Century Europe,” p. 2.
- 6. Ibid., p. 7.
- 7. Luis Amadeo Hernandez, “The Gold Standard and the Disappearance of the Mexican Silver Dollar as International Currency in Japan and East Asia Markets, 1850–1905” (unpublished manuscript, May 13, 2001), p. 5, PDF at SSRN.
- 8. Ibid., p. 3.
- 9. Murray N. Rothbard, What Has Government Done to Our Money? (Auburn: Mises Institute, 2010), p. 61.
- 10. David Glasner, Free Banking and Monetary Reform (Cambridge: Cambridge University Press, 1989), p. 97.
- 11. See Ted Wilson, Battles for the Standard: Bimetallism and the Spread of the Gold Standard in the Nineteenth Century (New York: Routledge, 2018), chap. 2.
- 12. Before the monometallic gold standard, most coins that circulated were “full-weight” coins in which the assigned value of the coin was equivalent to the value of the metals contained in the coin. With the rise of the gold standard and national currencies, however, a key change “was the creation of a subsidiary ‘token’ coinage, that is, a coinage where the face value of lower denomination coins no longer derived from their metallic content but from a value assigned by the state vis-à-vis gold. To maintain their value, the supply of the token coins became closely managed by the state.” See Eric Helleiner, “Denationalising Money? Economic Liberalism and the ‘National Question’ in Currency Affairs,” in Nation-States and Money: The Past, Present and Future of National Currencies, ed. Emily Gilbert and Eric Helleiner (Oxford: Routledge, 1999), p. 142.
- 13. P.L. Cottrell, “Silver, Gold, and the International Monetary Order,” in Britain in the International Economy, 1870–1839, ed. S.N. Broadberry and N.F.R. Crafts (Cambridge: Cambridge University Press, 1992), p. 223.
- 14. Marc Flandreau, The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848–1873 (New York: Oxford University Press, 2003), pp. 196–97.
- 15. Ibid., pp. 195–96.
- 16. Ibid., p. 199.
- 17. Henry Parker Willis, A History of the Latin Monetary Union: A Study in International Monetary Action (Chicago: University of Chicago Press, 1901), p. 266.
- 18. Rothbard, What Has Government Done to Our Money?, p. 61.
- 19. Ibid., p. 62.
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