Why and how to manage the gold standard?

From the 1870s and until the publication of Cassel’s paper, “The present situation in the foreign exchanges” (1916), the efficiency of a gold standard system was questioned. The demonetization of silver in Germany (1871) and the United States (1873-79) brought about a crisis in bimetallism as an international monetary system.

The main neoclassical quantity theorists agreed that the shift from bimetallism to the gold standard caused a contraction of the monetary base, a phenomenon of relative scarcity of the currency and consequently deflation. In addition to Ricardo, these quan­tity theorists also referred to John Stuart Mill’s Principles of Political Economy (1848) to explain that in a gold standard regime, even if the monetary unit is defined by a fixed quantity of gold, its value is variable; it is determined by the law of supply and demand. The demand for money depends on the quantity of goods to be traded, and the supply of money depends on its quantity, its velocity of circulation and credit. Moreover, they emphasized that the value of money is not linked to the price of gold but to the level of prices of all goods in the economy that gold allows to circulate. The variations in the value of the money may be measured by the fluctuation of a price index. Aiming to sta­bilize the level of prices, they developed theories of managed money like the coinage of silver token money (for example, the “billon d’argent regulateur” of Leon Walras 1884), the adoption of a joint silver and gold bullion standard (Alfred Marshall’s symmetallism 1887), Aneurin Williams’s (1892a, 1892b) and Irving Fisher’s (1911, 1913) proposals for compensated sterling or dollar plans, and finally the gold exchange standard first conceived by Alexander Martin Lindsay in 1876.

The gold standard was no longer conceived of as an automatic system leading to monetary stability. It was rather seen as a system that has to be managed by coopera­tion between states. Thus, in Interest and Prices (1898 [1965]), Knut Wicksell suggested the implementation of international and symmetrical coordinated adjustments of bank rates by central banks; Irving Fisher (1911, 1913) called for an international implemen­tation of compensated monies - dollar, sterling, franc, and so on - and Ralph Hawtrey explained in Good and Bad Trade (1913) that a metallic currency is not sufficient to remove the inherent instability of credit and that a discretionary management of paper money issued by the central bank is necessary.