A Brief History of Gold (Part I)

1.1 Origins: The Birth of Precious-Metal Coinage

Gold's monetary history can be traced back to the dawn of civilisation. Around the 7th century BCE, the Kingdom of Lydia struck the world's first precious-metal coins from electrum, a natural alloy of gold and silver. These pieces were cast in uniform weights and purities and bore official stamps. Circa 550 BCE King Croesus of Lydia went a step further, issuing separate pure-gold and pure-silver coins and thereby pioneering an early bimetallic standard of gold and silver.

Gold coinage subsequently spread across the ancient world. After the Achaemenid Empire conquered Lydia, Darius I introduced the daric at the end of the 6th century BCE. Weighing roughly 8.36 grams and of exceptionally high fineness, the daric became the preferred means for large-value payments and cross-border trade and remained in circulation for more than 150 years.

In classical Rome gold was formally incorporated into the imperial monetary system. Late in the Republic the Romans began to issue the aureus, weighing about 8 grams of fine gold. Under Augustus the aureus became the empire's principal high-denomination coin alongside the silver denarius. In the late empire Constantine replaced the aureus with the solidus (4.5 grams), which went on to serve as the Byzantine Empire's stable gold anchor for several centuries.

By contrast, major Eastern civilisations followed different trajectories. In China gold was prized as a store of wealth but rarely functioned as an everyday medium of exchange. During the Qin and Han dynasties copper cash constituted the principal currency, while gold was reserved for hoarding or ceremonial gifts. Some dynasties did promulgate gold currency—Han-era "gold cakes" are an example—but circulation remained limited.

1.2 Early Bimetallism: The Medieval Gold-and-Silver Standard

After the fall of the Western Roman Empire Europe faced a dearth of gold, and silver occupied centre stage. In early-mediaeval England the basic unit, the pound, originally equated to one pound of sterling silver, with the penny circulating as the main small coin. As Mediterranean commerce revived and new mines were developed, gold re-emerged in late-mediaeval Europe.

In the 13th century the Italian banking hubs minted sizeable quantities of high-purity gold coins—most notably Florence's florin (1252) and Venice's ducat (1284)—whose stability in weight and fineness allowed them to dominate European trade for half a millennium. England experimented with a florin of its own in 1344, but because the coin over-valued gold relative to silver it failed in circulation. Subsequent issues such as the noble and the angel gradually entrenched gold's position within the English currency system, ushering in a bimetallic regime in which both gold and silver were legal tender.

Throughout the Middle Ages and early modern period many countries adhered to an explicit gold-and-silver standard, granting legal-tender status to both metals and fixing a statutory mint ratio between them. In 18th-century France the official ratio was 15½ : 1, meaning one unit of gold legally equalled 15.5 units of silver by weight. In practice, however, market ratios fluctuated. Whenever the market ratio diverged from the legal ratio, Gresham's Law set in: the undervalued metal was exported or melted, while the over-valued metal dominated domestic circulation.

Prior to the second half of the 19th century, the world's monetary architecture was still characterised by either concurrent use of gold and silver or outright silver standards. China and India, for example, continued to anchor their systems on silver. On the European continent France informally upheld a bimetallic order: the Latin Monetary Union countries freely coined gold and silver at 15.5:1, dampening international volatility in the ratio.

That equilibrium collapsed in the 1870s when Germany and the United States successively demonetised silver and adopted gold between 1870 and 1873, triggering a rapid global transition to the gold standard. The newly unified German Empire used French war-indemnity payments—paid largely in silver—to purchase gold reserves and, through reforms enacted in 1871–73, replaced the various state silver currencies with a gold-based mark.

The United States followed with the Coinage Act of 1873, ending free coinage of silver (the so-called "Crime of 1873") and limiting full legal-tender status to gold (formally legislated in 1900). Germany's and America's moves sharply curtailed silver demand; the gold–silver ratio swung heavily in favour of gold, putting pressure on countries that remained on a silver or mixed standard. The Latin Monetary Union suspended free silver coinage in 1878, and India, Russia and others likewise gravitated toward gold or gold-exchange standards. By the fin de siècle the gold standard was, for all intents and purposes, universal—the era of "silver retreats and gold advances."

The reasons nations opted for gold were multifaceted. First, relative economic strength mattered: Britain, the era's commercial and financial hegemon, had legislated the gold standard in 1816, thereby exerting a powerful demonstration effect and competitive pressure. Second, supply dynamics shifted. The California (1848) and Australian (1851) gold rushes boosted global production dramatically: annual output leapt from under 50 tonnes in the 1820s–1840s to more than 200 tonnes in the 1850s–1860s, providing ample monetary metal. Meanwhile, silver's surplus, coupled with fiscal stress in silver‑standard countries, eroded confidence.

Third, the gold standard facilitated exchange-rate stability and capital flows: Germany's 1871–73 reform, for instance, partly reflected fears of exclusion from the gold‑based trading bloc. Within a few years the world shifted from bimetallism or silver monometallism to gold, inaugurating the classical gold‑standard era.

1.3 The Classical Gold Standard

Spanning roughly 1870‑1914, the classical gold standard represented the first truly global monetary order. Under the system every country announced an official gold price and granted unrestricted convertibility between its currency and gold at that price. In the United Kingdom one troy ounce of gold equalled £4.25; in the United States the price was US$20.67, yielding a fixed sterling–dollar rate of 1 : 4.866. Central banks promised to convert notes into gold at the mint price, making gold the ultimate anchor of monetary value.

Automatic adjustments occurred via cross‑border gold flows under the price–specie‑flow mechanism. An inflationary country, with domestic prices above the international norm, saw gold leave as arbitrageurs exchanged paper for metal and shipped it abroad. The outflow contracted the money stock, pushing prices and wages down and restoring competitiveness. Surplus countries experienced the opposite. Thus, international imbalances were self‑correcting.

Governments were expected to follow the "Rules of the Game": tighten policy when gold left and ease when it arrived, thereby reinforcing rather than offsetting the adjustment effects of gold movements. In practice, central banks sometimes didn't fully adhere to these rules, often choosing to partially sterilize the domestic impact of gold flows, but overall the gold standard functioned well. The results were long-term price stability and highly fixed exchange rates.

Between 1880 and 1914 leading economies typically recorded annual inflation of 0–0.3%; Britain averaged 0.12%. Fixed parities underpinned an unprecedented expansion of trade and capital: the stock of overseas investment rose from 7% of world GDP in 1870 to c. 20% by 1914. Economists often regard the period as "a remarkable era of global prosperity, marked by steady productivity gains and negligible inflation".

Nonetheless, the gold standard had inherent weaknesses. Adjustment relied on flexible prices and wages; deficit countries endured deflationary pain, while surplus nations imported inflation, an asymmetry often shifted towards the former. Moreover, policy rigidity limited responses to shocks. In wars or severe crises, the fixed gold price constrained central banks' lender‑of‑last‑resort role—what Keynes in 1924 called the "barbarous relic". The outbreak of the First World War would soon expose these flaws.

1.4 Crisis and Collapse

World War I (1914‑18) dealt the classical gold standard a fatal blow. As the war broke out, belligerents suspended convertibility to finance unprecedented military outlays via monetary expansion. In August 1914 Britain suspended gold convertibility and issued non-convertible notes; France, Germany and Russia similarly abandoned the gold standard to finance war spending through inflation. By late 1914 the gold-cover ratios of belligerent central banks plummeted—Austria-Hungary's from 63 % to 1 %, Germany's from 57 % to 10 %—exposing the system's fragility. The gold standard's constraints were abandoned under wartime pressure, resulting in inflation: prices surged in all belligerent nations during the war, followed by post-war economic instability and currency volatility. By the war's end in 1918, the gold standard system was effectively shattered, with major global currencies no longer bound by gold standard constraints.

Post-war policymakers sought a return to stability, yearning for the predictability of gold, but circumstances had changed radically. Money supplies far exceeded gold reserves, and gold holdings were unevenly distributed: the United States held the lion's share while European treasuries were depleted. The 1922 Genoa Conference proposed a Gold Exchange Standard: a two‑tier system in which key currencies (sterling, dollar) remained convertible into gold, while others pegged to those key currencies and held them as reserves. Under this system, central bank reserves could partly consist of foreign exchange, economizing on gold demand. The Genoa system aimed to address the shortage of gold and rapidly rebuild a stable international exchange rate regime.

Britain championed the scheme. In 1925 Chancellor Winston Churchill restored sterling to its pre-war parity of US$4.86, an over-valuation that undermined competitiveness and forced painful domestic deflation, culminating in the 1926 General Strike. Doubts about sterling prompted France and others to redeem sterling balances for gold, draining the Bank of England. A Federal Reserve rate cut in 1927 temporarily eased pressures but arguably fuelled the 1929 Wall Street boom.

The 1929 crash and ensuing Great Depression exposed gold's rigidity. Countries that clung to gold suffered deeper deflation, whereas those that left earlier recovered faster. In September 1931 Britain abandoned gold; by 1932 most nations had followed. The few hold-outs—most notably the United States and France—endured brutal deflation. Franklin Roosevelt suspended gold convertibility in 1933 and devalued the dollar. France capitulated in 1936, completing gold's retreat.

1.5 Why Gold Lost Its Monetary Anchor Status

Gold's displacement reflected multiple forces:

War and fiscal pressure – Modern mass warfare proved incompatible with gold's rigid constraints. Nations opted to sacrifice gold discipline rather than forego deficit finance.

Economic crises and policy autonomy – The Depression demonstrated that domestic stabilisation objectives trumped fixed exchange rates. Policymakers sought the flexibility to reflate and devalue.

External imbalances and unequal gold distribution – Structural payments gaps and limited new supply meant that gold accumulated in surplus countries, forcing others into contraction. A parallel dynamic doomed the post-1944 Bretton Woods gold-exchange system when US deficits eroded confidence.

Political and institutional change – Rising democratic demands for full employment made governments reluctant to subordinate domestic objectives to the exigencies of gold. International cooperation faltered.

By the mid-20th century gold had been pushed out of everyday monetary use, supplanted by sovereign fiat currencies. The 1944 Bretton Woods Conference ushered in a new USD-centred system—whose rise and fall we examine in Chapter 2.

2.1 The Bretton Woods Conference

During World War II the Allies planned a post‑war order to avoid a repeat of inter‑war chaos. In July 1944, 730 delegates from 44 nations convened at Bretton Woods, New Hampshire, and agreed on a system combining fixed but adjustable parities with institutional support. Debates centred on proposals by US Treasury adviser Harry Dexter White and British economist John Maynard Keynes.

Keynes proposed an ambitious International Clearing Union that would issue a supranational currency, the bancor, linked to gold. Member central banks would settle imbalances via ICU accounts; surplus balances would earn interest, and deficit overdrafts would pay interest, creating symmetric incentives to adjust. Penalties would be levied on persistent surpluses as well as deficits. Keynes's design emphasized the regulatory function of international institutions, aiming to both prevent competitive devaluations and avoid deficits being borne solely by deficit countries.

White's scheme was more modest: a Stabilization Fund of US$50 billion with quotas in gold and domestic currency, no new supranational money, and fixed exchange rates against the dollar with limited scope for adjustments. Capital controls were permitted.

The final Bretton Woods Agreements largely adopted White's architecture with compromises:

1. Creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank).
2. A fixed gold price of US$35/oz, with the US Treasury committed to unlimited convertibility for official holders.
3. Other currencies pegged to the dollar within ±1 %, with parity changes allowed only under "fundamental disequilibrium."
4. Capital controls were explicitly permissible.
5. IMF quota-based financing and surveillance, plus "scarce-currency" provisions.

This two-tier gold-exchange standard—gold backing the dollar, and the dollar backing other currencies—took full effect only in 1958 when major countries lifted current-account controls.

2.2 The New Role of the Dollar

Backed by two-thirds of the world's official gold and the largest economy, the dollar became the principal international settlement and reserve currency. By the mid-1960s it accounted for roughly 60 % of global reserves; sterling's share fell to about 30 %.

The Bretton Woods Agreement also created an important international financial institutional framework. The International Monetary Fund (IMF), as guardian of the new system, was responsible for overseeing the exchange rate regime and providing short-term financing. When member countries faced current account deficits, they could draw foreign exchange (mainly dollars) from the IMF in proportion to their quotas to cover shortfalls. The IMF ensured fair member participation through the quota system: each country's quota determined its access to funds and voting rights, with capital paid in both currency and gold. The IMF also had authority to monitor members' exchange rate policies, coordinate necessary parity adjustments, and prevent competitive devaluations. This mechanism enhanced confidence in fixed exchange rates while providing liquidity support during crises and was seen as correcting the lack of international cooperation in the interwar period.

The World Bank (IBRD) bore responsibility for post-war reconstruction and development assistance. While not directly related to international monetary system stability, by providing loans to war-damaged countries, the World Bank fostered global economic recovery and trade revival, creating a favorable environment for the fixed exchange rate system. The IMF and World Bank were known as the "twin pillars" of Bretton Woods, safeguarding financial stability and economic development respectively.

2.3 Stable Operation and Latent Fault Lines

In its formative years the Bretton Woods regime underwrote the post‑war "golden age": rapid real growth, subdued inflation and an unprecedented expansion in trade. Beneath this prosperity, however, structural stresses accumulated, encapsulated in the Triffin dilemma. To furnish the world with reserve assets the United States had to run persistent balance‑of‑payments deficits, yet the resulting stock of external dollars progressively outstripped the Treasury's gold stock, eroding credibility in the dollar's official US$35/oz parity.

From the late 1950s a widening gap between dollar liabilities and gold cover became visible. US gold holdings fell from 20,000 tonnes at their post-war peak to under 9,000 tonnes by 1971, while foreign official dollar holdings soared. A market premium over the official US$35 price emerged as early as 1960. The "gold pool" (1961) temporarily stabilised the market, but pressures resurfaced. An SDR facility launched in 1969 provided additional reserves but too late and on too small a scale.

2.4 Approaching the Breaking Point (1960–71)

The apparent tranquillity of the early-1960s concealed mounting strains. U.S. policy was the principal catalyst. President Johnson's "Great Society" programmes and the escalating Vietnam War were financed by fiscal expansion that the Federal Reserve accommodated with easy money. U.S. CPI inflation jumped from below 2 per cent in 1965 to over 6 per cent by 1969, and the balance of payments swung from near-equilibrium to a sizeable deficit. Within the Triffin framework, this trajectory pointed squarely toward a confidence crisis: U.S. allies began to doubt both Washington's ability and its willingness to maintain the dollar's gold value.

France led the charge against the dollar's privileged status. President Charles de Gaulle, long a critic of "dollar hegemony", used a press conference in February 1965 to denounce the system for conferring an "exorbitant privilege" on the United States and called for a return to a pure international gold standard. Paris promptly began swapping its dollar holdings for gold; between 1965 and 1967 the U.S. Treasury shipped some USD 3 billion in bullion to the Banque de France. Finance Minister Valéry Giscard d'Estaing likened the dollar to a "counterfeit standard": America could acquire real resources abroad with cost-free paper that gold-holding nations found increasingly intolerable.

To contain the incipient panic, the United States and seven Western European central banks formed the London Gold Pool in November 1961. The United States, United Kingdom, France, West Germany, Italy, Belgium, the Netherlands and Switzerland agreed to buy or sell gold jointly in the London market to cap the price at USD 35/oz. The pool pooled participants' bullion and intervened: selling when the price threatened to rise above parity and buying when it dipped below. Between 1962 and 1965 the arrangement kept the market price broadly stable and bought the dollar time. Washington meanwhile rolled out additional measures to curb the external deficit: the IMF General Arrangements to Borrow (GAB) in 1962, Roosa bonds to entice allies into holding dollar liabilities denominated in their own currencies, and the 1963 Interest Equalization Tax to stem capital outflows.

2.5 The "Nixon Shock" and Collapse (1971)

By the late-1960s the patchwork of fixes could no longer mask the scale of the imbalance. The ratio of foreign official dollars to U.S. gold had become untenable: from rough parity in 1960 to USD 50 billion in 1971 against a bullion stock of barely USD 10 billion—enough to cover less than 20 per cent of outstanding claims at the official price. Speculative pressure surged. In the first half of 1971 investors dumped dollars for gold and for revaluation-candidate currencies such as the Deutsche Mark. West Germany let the mark float upward in May; the Netherlands, Austria and others followed, triggering a domino effect across Europe.

Confronted with a stark choice: devalue the dollar or suspend gold convertibility, President Nixon convened his economic "war cabinet" at Camp David on 13–15 August. With the trade deficit widening, gold reserves haemorrhaging and markets in turmoil, the Administration opted for decisive unilateral action. On the evening of 15 August 1971 Nixon unveiled his "New Economic Policy", anchored on three pillars:

1. a 90-day wage-and-price freeze to check domestic inflation;
2. a 10 per cent import surcharge to pressure trading partners into revaluing and opening their markets; and
3. a "temporary closing of the gold window"—suspending dollar convertibility into gold.

Presented as a defence against "international money speculators," the suspension in effect scrapped the system's cornerstone: henceforth the dollar would float.

Allies were shocked and resentful at the lack of prior consultation—evidence, they argued, of high-handed "dollar diplomacy". Yet the die was cast; the gold pledge could not be restored. In December 1971 the Smithsonian Agreement sought to engineer a soft landing: the dollar was devalued roughly 8 per cent (raising the official gold price to USD 38/oz), partners re-pegged at new parities and widened intervention bands to ± 2.25 per cent. Nixon hailed it as "the most significant monetary agreement in history." The relief proved fleeting. A second devaluation (to USD 42.22/oz) followed in February 1973; speculative flows resumed within weeks. By March the major economies abandoned defence of their parities altogether. The European Community opted for a common float against the dollar while the yen and others moved to clean floats. The Bretton Woods fixed-rate system, in place for nearly thirty years, was dead; the world had entered the era of floating exchange rates.

2.6 Consequences

Global impact: The collapse of the Bretton Woods system marked the definitive end of the precious metal-based monetary era that had persisted for more than a century. From 1971 onward, gold was officially removed from the official exchange rate system, and national currencies entered a pure fiat credit era. No longer pegged to gold, the dollar floated freely, depreciating sharply against major currencies in the initial years (by the end of 1973, the dollar had depreciated over 15% against the yen and about 25% against the Deutsche Mark). This relieved America's long-accumulated competitive pressures but exacerbated global inflation: the early 1970s coincided with the "Great Inflation," and America's abandonment of the gold standard's discipline in favor of expansionary policies is considered a significant driver of the 1970s' high inflation. Some scholars note that after the gold window closed, central banks lost their anchor and expanded money supplies, which, combined with two oil crises, led to inflation rates far higher than in the 1960s. On the other hand, the implementation of floating exchange rates significantly increased exchange rate volatility, presenting businesses and investors with new currency risk management challenges. However, floating rates also gave countries monetary policy independence, with most developed countries' central banks gradually shifting their focus toward domestic inflation and employment rather than maintaining a specific exchange rate level.

Institutional evolution: Though the Bretton Woods system collapsed, its legacy continued in new forms. The IMF persisted, but its role shifted from maintaining fixed exchange rates to focusing more on exchange rate monitoring, debt crisis assistance, and other areas. The 1976 IMF Jamaica Agreement amended the Fund Agreement to legally recognize floating exchange rates and demonetize gold: the IMF no longer required member currencies to be linked to gold, stripping gold of its official pricing and reserve asset status. Most of the IMF's official gold reserves were auctioned off in batches or returned. Central banks also reduced their gold holdings to varying degrees, treating gold as a general financial asset rather than a monetary standard. However, gold never completely lost its attractiveness as a store of value: in subsequent decades, gold prices often soared during monetary system turbulence or dollar weakness, indicating that the market still viewed gold as one of the ultimate safe-haven assets. Overall, after 1971, the international monetary system entered an era of unanchored credit currencies, with a floating exchange rate network composed of a few major currencies such as the dollar, euro, and yen replacing the former gold-dollar standard.

Root causes: The fundamental reason for the end of the Bretton Woods system lay in the system's inherent irreconcilable contradictions (Triffin's dilemma) colliding with the U.S. economic policy shift (high deficits and high inflation), which ultimately led to the system's breakdown in the absence of international coordination. As Alan Greenspan later commented: "It wasn't the gold standard that failed, but politics determined its failure." No post-war nation was willing to be bound by the strict fiscal and monetary constraints required by a fixed gold price; once the United States itself abandoned "low-inflation sound policies," the entire system became unsustainable. The abandonment of gold as the traditional monetary anchor superficially appeared to be an inevitable choice of development, but it also reflected a profound shift in the international monetary system from rules (gold discipline) to power (dollar credit). While Nixon's 1971 shock triggered immediate exchange rate fluctuations and financial market turmoil in the short term, in the long run, it ushered in a new era for international currency, as countries began to explore macroeconomic policy coordination and new reserve systems (such as diversified reserve currencies and Special Drawing Rights) under floating exchange rates. The lessons from this shock also prompted countries to place greater emphasis on avoiding the accumulation of imbalances, as seen in the G7's regular economic summits discussing exchange rates and policies from the late 1970s and coordinated market interventions like the 1985 Plaza Accord, which reflected lessons learned from the collapse of Bretton Woods.