Barry Eichengreen (1996) describes the gold standard as "one of the great monetary accidents of modern times," owing to England's "accidental adoption" of a de facto gold standard in 1717. Sir Isaac Newton was master of the mint at the time and, according to Eichengreen, set too low a price for silver in terms of gold, inadvertently causing silver coins to mostly disappear from circulation. As Britain emerged as the world's leading financial and commercial power, the gold standard became the logical choice for many other countries that sought to trade with and borrow from, or emulate, England, replacing silver or bimetallic standards.
England officially adopted the gold standard in 1816. The United States moved to a de facto gold standard in 1873 and officially adopted the gold standard in 1900. The international gold standard refers to the period from the 1870s to World War I, during which time the major trading countries were simultaneously on the gold standard. Though many countries went off the gold standard during World War I, some returned to a form of gold standard in the 1920s. The final blow to the gold standard was the Great Depression, by the end of which the gold standard was history.
Eichengreen argues that the emergence of the gold standard reflected the specific historical conditions of the time. First, governments attached a high priority to currency and exchange rate stability. Second, they sought a monetary regime that limited the ability of government to manipulate the money supply or otherwise make policy on the basis of other considerations. But by World War I, economic and political modernization was undermining the support for the gold standard. Fractional reserve banking, according to Eichengreen, "exposed the gold standard's Achilles' heel." The threat and, indeed, reality of bank runs created a vulnerability for the financial system and encouraged governments to seek a lender of last resort to provide liquidity at times of distress. Such intervention was, however, inconsistent with the gold standard.
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... In fact, drains on a country's gold or foreign exchange reserves were typically countered by an increase in central bank's discount rate. The effect on income and prices was, in this case, not due directly to changes in the gold supply, but to the changes in interest rates that were implemented to limit the drain on gold.
However, principle and practice differed under the gold standard. Richard Cooper (1992) summarizes the contrast in the following terms: "The idealized gold standard . . . conveys a sense of automaticity and stability--a self-correcting mechanism with minimum human intervention, which ensures rough stability of prices and balance in international payments. . . .The actual gold standard could hardly have been further from this representation."