All Commentary
Sunday, September 1, 1996

The Anatomy of an International Monetary Regime: The Classical Gold Standard 1880-1914

The Gold Standard Could Work Once Again

Monetary policy today is guided by little more than government fiat—by the calculations, often mistaken economic theories, and whims of central bankers or, even worse, politicians. Under such a regime, inflation of three or four percent annually has come to be viewed as a stellar monetary performance. However, under a more sound monetary system—i.e., a gold standard—such increases in the general price level would be seen as wildly inflationary.

Over the years, the operations and impact of the gold standard have been subject to a variety of gross misconceptions and misrepresentations. With The Anatomy of an International Monetary Regime: The Classical Gold Standard 1880-1914, Giulio M. Gallarotti makes a valuable contribution to the understanding of the impact and operations of the gold standard.

Gallarotti debunks numerous myths. Among them, contrary to much of the prevailing literature on the classical gold standard, one government or central bank did not come to dominate international monetary relations during the classical gold era. Close monetary cooperation between national governments turned out to be the rare exception rather than the rule. In addition, contrary to the long-accepted gold model, the transfer of gold to clear international payments was actually a last resort.

The author shows the gold standard, in reality, to be diffuse and market driven. At the outset, Gallarotti observes: “Outcomes under the classical gold standard were principally conditioned by market processes throughout the period: i.e., outcomes were primarily the resultants of private transactions in the markets for goods and money. Unlike the international monetary regimes that would follow World War I, very little in the prewar regime was conditioned by the actions of public authorities at the international level.”

Indeed, international stability was not a result of intense cooperation among national governments or central banks. Gallarotti painstakingly documents the failure of each of the great international monetary conferences of the era that were held with the purpose of establishing formal cooperation among nations and central banks. Instead, as the author notes, “the various domestic regimes crystallized into a greater international monetary regime.”

Gallarotti accurately identifies the intellectual roots of the gold standard as well: “At the very heart of the metallist orthodoxy lay a strong laissez-faire ethic, and this was embodied in the central injunctions calling for the preservation of the purchasing power of the national monetary unit through some rule dictating monetary creation. It was this metallist injunction, by which inflation was to be controlled, that gave preference for stable money a liberal character. The alternative to a metallist rule was a discretionary manipulation of the money supply. This made the purchasing power of money subject to the idiosyncrasies and whims of public authorities. . . . Metallist rules essentially effected a fundamental liberal objective: removing economic processes from central, public, discretionary manipulation.”

Gallarotti concludes that the “success of the gold standard was ultimately and inextricably tied to the success of classical liberalism.” Classical liberalism’s case for freedom of movement (for individuals, factors of production, goods, and money), fiscal prudence, small government, and anti-inflation bias, all strongly buttressed the gold standard.

In the end, few economists objectively can find fault with the overall track record of the economy under the gold standard. The author summarizes the period as follows:


Among that group of nations that eventually gravitated to gold standards in the latter third of the 19th century . . . , abnormal capital movements . . . , were uncommon, competitive manipulation of exchange rates was rare, international trade showed record growth rates, balance-of-payments problems were few, capital mobility was high (as was mobility of factors and people), few nations that ever adopted gold standards ever suspended convertibility (and of those that did, the most important returned), exchange rates stayed within their respective gold points (i.e., were extremely stable), there were few policy conflicts among nations, speculation was stabilizing . . . , adjustment was quick, liquidity was abundant, public and private confidence in the international monetary system remained high, nations experienced long-term price stability (i.e., predictability) at low levels of inflation, long-term trends in industrial production and income growth were favorable, and unemployment remained fairly low.

What else could one possibly want from a monetary regime?

The Anatomy of an International Monetary Regime occasionally falls into the type of slogging academic writing style that justifies the impression that economists cannot write well. However, it is worth the reader’s time to mine through some of this coarse writing because the historical and economic gems eventually discovered truly shine.

Our friends in Europe particularly may find this book of interest as they continue struggling to form a European Monetary Union. Gallarotti cites Ludwig Bamberger, German monetary authority during the late nineteenth century who made the simple point that “a world monetary union would be superfluous if all countries based their currencies on gold.”

Gallarotti’s book should be read by anyone with an interest in how the gold standard worked in the past and could once again. Indeed, this reviewer sees only huge benefits being derived from a return to classical liberalism and the gold standard.