After Britain formally adopted the Classical Gold Standard in 1816, it set a precedent for other nations to follow. Over the course of the 19th century, many of the world’s major economies—including Germany, France, the United States, and Japan—transitioned to gold-backed monetary systems.
By the late 1800s, the Classical Gold Standard had become a global financial system, providing stable exchange rates, lower inflation, and increased international trade. This system played a crucial role in the economic expansion of the Industrial Revolution, but it also had limitations and risks that would eventually contribute to its decline in the 20th century.
Why Did Other Countries Adopt the Gold Standard?
1. The Success of Britain’s Gold Standard
- Britain’s adoption of the gold standard led to strong economic growth, low inflation, and stable trade.
- As the world’s leading industrial and financial power, Britain set the standard for monetary policy.
- Countries that traded with Britain saw the benefits of using a gold-backed currency.
2. Increasing Global Trade & Investment
- With the rise of industrialization, international trade was expanding rapidly.
- The gold standard provided stable exchange rates, reducing the risks of cross-border transactions.
- Investors and merchants preferred dealing in gold-backed currencies over unbacked paper money.
3. Financial Stability & Public Confidence
- Gold-backed money prevented excessive inflation, maintaining long-term price stability.
- People and businesses trusted that their money would retain value, encouraging investment and economic growth.
✅ Result: By adopting the gold standard, nations could boost their economies, attract foreign investment, and strengthen their financial systems.
The Major Countries That Adopted the Gold Standard
A. Germany (1871–1873)
- After winning the Franco-Prussian War (1870–1871), Germany received a large indemnity (5 billion francs) from France, much of it in gold.
- Germany used this wealth to switch from the silver standard to the gold standard in 1873, replacing the silver-based thaler with the gold-backed mark.
- This move influenced other European nations to transition to gold.
B. France & the Latin Monetary Union (1873–1878)
- France, Belgium, Switzerland, and Italy formed the Latin Monetary Union (LMU) in 1865, originally using a bimetallic system (gold and silver).
- After Germany’s shift to gold in 1873, France and other LMU nations also moved toward the gold standard by the late 1870s.
C. The United States (1873–1900)
- The Coinage Act of 1873 ended the free coinage of silver, effectively putting the U.S. on a de facto gold standard.
- The U.S. formally adopted the gold standard in 1900 with the Gold Standard Act, solidifying its commitment to gold-backed money.
D. Japan (1897)
- After winning the First Sino-Japanese War (1894–1895), Japan used Chinese indemnity payments (paid in gold) to transition from a silver-based currency to the gold standard in 1897.
- This move helped Japan integrate into global trade and financial markets.
✅ Result: By the end of the 19th century, most major economies had joined the gold standard, creating a global monetary system.
How the Global Gold Standard Worked
A. Fixed Exchange Rates
- Each country set a fixed value for its currency in terms of gold (e.g., 1 British pound = 113 grains of gold).
- This meant that exchange rates between gold-standard countries were fixed and stable.
B. Free Convertibility
- Paper money could always be exchanged for gold at a fixed rate.
- This limited inflation because governments could not print unlimited amounts of money.
C. Gold Flows Balanced Trade
- Countries with trade surpluses gained gold, increasing their money supply.
- Countries with trade deficits lost gold, reducing their money supply and encouraging economic adjustments.
✅ Result: The gold standard created a stable, interconnected global economy, promoting trade, investment, and financial growth.
The Benefits & Challenges of the Gold Standard
Benefits:
✅ Stable Currency Values: Fixed exchange rates made trade and investment predictable.
✅ Low Inflation: Governments could not print excessive money, preventing hyperinflation.
✅ Global Economic Growth: Industrialized nations experienced rapid expansion under the gold standard.
Challenges:
⚠️ Deflationary Pressure: When gold supplies were limited, economies could suffer from deflation and recessions.
⚠️ Gold Supply Constraints: Economic growth depended on new gold discoveries, such as those in California (1849) and South Africa (1886).
⚠️ Limited Government Flexibility: Countries could not easily adjust monetary policy in times of crisis.
✅ Result: While the gold standard provided stability, it also created economic rigidity, which would later contribute to its downfall in the 20th century.
Conclusion: The Gold Standard Becomes the Foundation of Global Finance
By the late 19th century, the Classical Gold Standard had become the dominant monetary system worldwide. Countries that adopted it:
✅ Experienced financial stability and strong trade growth.
✅ Attracted foreign investment due to trusted currency values.
✅ Created a more interconnected global economy.
However, despite its success, the gold standard’s rigid nature made economies vulnerable to external shocks, setting the stage for future economic crises in the 20th century.