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In discussions surrounding of the world’s monetary systems today there is usually one thing almost everyone can agree on: that money should be controlled by the organizations we call “states” or “sovereign states”. Nowadays when we say “the US dollar” we mean the currency issued by the US government. When we say “the British pound” we mean the money issued by the regime of the United Kingdom.

This assumed need to have state-issued money has not always been the reality, of course. Indeed, the history of the rise of the state is a history replete with efforts by states to replace private-sector money with state-controlled money.

The reasons for this are numerous. Control of the money supply—usually complemented by intervention in the financial sector—allows states much more flexibility in expanding state spending and state borrowing. Perhaps most importantly, this allows states to spend prodigiously in times of war and other “emergencies.”

As we will see, this struggle between the state and private finance has been a long one. It took many centuries for regimes to secure the sort of legitimacy and regulatory power necessary to claim a monopoly over money. And even today, states are still somewhat constrained by the realities of international competition between currencies. They are also constrained by the continued existence of quasi monies that function as stores of value, such as gold, silver, and cryptocurrencies. Yet it is impossible to deny that the state has made enormous gains in recent centuries when it comes to taking control of money.

The order of these events also reminds us of another important aspect of states and money: the rise of states was not conditional on kings and princes seizing control of the production and regulation of money. Rather, the causation runs in the other direction: as states became more powerful, they used that power to also take control of money.

Early Efforts to Control the Money Supply

In the ancient world, the despotic empires of old—under which we could include the Roman Empire—were careful to mint their own money and to control whatever primitive “financial systems” existed. The Romans famously devalued their currency for long periods of time—most notably under Diocletian—leading to the ruin of many Roman citizens.

According to David Glasner, the “prerogative of the sovereign over the coinage was preserved after the fall of Rome.”1  But this was only in theory. The civil governments of this period were far too weak to enforce a monopoly on money. Martin van Creveld writes, “Given the decentralized nature of the political system and its instability, European Rulers during the Middle Ages were generally in no position to imitate their oriental counterparts” in the Persian, Mongol, and Chinese empires.2

Moreover, there wasn’t that much money to go around in Western Europe. Coins were often in short supply, and the agrarian nature of Western Europe meant much trade was done through bartering.

That began to change in the later Middle Ages as Europe urbanized and began to produce an increasing agricultural surplus. Driven largely by Italian bankers who set up “branch offices” in France, Spain, and the Low Countries, a financial system took shape which included the production of both coins and banknotes.

Yet the monetary system was dominated by the private sector, and Van Creveld reminds us that a sizable amount of money in this period

was produced not by the slowly emerging state but by private institutions. Before 1700, attempts to develop credit systems succeeded only in this places where private banking and commerce were so strong as to virtually exclude royal authority; in other words where merchants were the government…. Common wisdom held that, whereas merchants could be trusted with money, kings could not. Concentrating both economic and coercive power in their own hands, all too often they used it either to debase the coinage or to seize their subjects’ treasure.3

The kings of Europe sought to control the money nonetheless. One of the earliest meaningful attempts materialized in England, where monarchs early on developed a more centralized and cohesive national regime. Thus, after the early date of 1222 in England, according to John Munro, “money-changing and trade in bullion was a strictly enforced royal monopoly exercised by the Royal Exchanger.”4 Enforcement consisted of government officials engaged in acts designed to, as Munro says, “suppress private trade in precious metals, to purchase or confiscate foreign coins, and to deliver them to the Tower of London mint for recoinage.”5

It’s unclear how well this was enforced, but such concerted efforts at national regulation were far more haphazard in much of Europe.

For example, the French state—the largest and most centralized state on the Continent, sought in earnest to take control of the money supply by the sixteenth century. The results were mixed. Efforts to hammer together a national monetary regime began in the late Middle Ages, yet “France was not unified monetarily. Silver circulated in the west after the middle of the sixteenth century—gold coin before—and copper in the east, infiltrating from Germany.”6

In practice, national kings needed to buy off uncooperative nobles with monopoly privileges, rights to tax, and the sale of titles. Kings relied on manpower supplied by nobles to carry out royal prerogatives. As late as the sixteenth century, although, as Charles Kindleberger notes, 

in principle, only the king has the right to coin precious metals, in practice he farmed out this privilege, as was also the case in the exploitation of the royal domain and tax collection, because kings, apart from Prussia, had only limited bureaucratic staff. Achieving a central monopoly of the coinage took two centuries. Moreover national borders were porous, and foreign coins circulated freely. A French edict of1557 counted 190 coins of different sovereigns in use in France.7

The lack of national monetary monopolies in most cases did not stop nascent European states from engaging in two centuries of state building. By the sixteenth century, France was already building an absolutist state even in the midst of ongoing currency competition. By the mid-seventeenth century, of course, the state had come into its own, with absolutism gaining ground in France, Spain, Sweden, and other parts of the Continent. In England—although the Stuarts failed to achieve their much-desired absolute monarchy—the state progressed far in the direction of a centralized, consolidated state during this period. Indeed, by the mid-seventeenth century, Europe’s Thirty Years’ War—what might be called Western Europe’s first era of “total war,” ended with the consolidation of the state system throughout Western Europe.

Indeed, war and state building—two things that were often one and the same—drove efforts to build government revenues through debasements of the coinage. It was war with Scotland that drove Henry VIII to begin a multiyear period of debasing the currency in 1542, which continued into the reign of Edward VI. War drove other monarchs to similar ends, and on the Continent Charles V devalued the gold taler in 1551. In the seventeenth century, European monarchs engaged in “progressive debasement … in anticipation of the Thirty Years’ War.”8 Ultimately, Kindleberger concludes,  “Many princes in the sixteenth and seventeenth centuries did a roaring business in currency depreciation.”9

The Effects of Continued Monetary Competition

Spain, France, and other rising states of the period accomplished all this without establishing true monopolies over the money supply, and currency competition limited what states could get away with. Even if national states had been able to solidify de jure monopoly control of money within their own borders, the sovereign’s money still faced competition from currencies in neighboring states and principalities. Just as dozens of different types of coins circulated within France, it was always possible for merchants, financiers, and more mobile classes of individuals to move their wealth in such a way as to avoid using the more heavily devalued currencies.

Thus, monarchs were cognizant of the risks that devaluation brought. “Too much” debasement of the currency could cause merchants, and even residents, to flee to competing imported or black-market currencies. Practical limitations controlled how much a regime could debase its currency. Thus, when Henry VIII began his campaign of debasement, he combined it with a broader wartime policy of confiscating goods and church property, and compelling loans.10

In the seventeenth century, the ability to escape debased national currencies was further facilitated by the advent of the Bank of Amsterdam. Established by the City of Amsterdam in 1609, the bank—technically a “government bank”—calculated the values of the “no fewer than 341 silver and 505 golden coins” circulating in the Dutch Republic. The bank helped merchants identify which coins were “good” and which were debased.11 The bank then provided credit based on coins’ “real value” regardless of the coins’ claimed nominal values. The bank issued coins known as bank guilders which became the “the world’s most used currency at the time,” or perhaps even a “reserve currency” of a similar status to the US dollar today.12 This was not due to any moral righteousness on the part of Dutch politicians. It is likely that the Dutch regime would have also preferred to manipulate its own currency for gain. But the smallness of the Dutch Republic and its reliance on foreign trade greatly limited the regime in this regard. Thus, the Dutch were essentially forced to be become a reliable, competitive financial center in order to compete with larger states.

Asserting State Control over the Private Banks

Control of the coinage was only one aspect of states’ fights to control money.

After all, much of the money being handled by Europe’s banks during this period was in the form of “bills of exchange,” which facilitated the movement of funds across Europe without the need for physically moving metallic money. These bills began to function as money as well, and even as states were asserting greater control over coinage in the fifteenth and sixteenth centuries, “private institutions were thus beginning to develop paper money.”13  According to Kindleberger,

Begun early in the thirteenth century, the functions of the bill of exchange expanded in the sixteenth century as it became successively assignable, transferable, negotiable, and from the 1540s, discountable, bridging time and space, serving as private money as distinct from specie[,] which was the money of the prince.14

Banks proved to be essential, providing access to money in many cases, since even as late as the eighteenth century in many places, coinage was in short supply. These shortages may have been especially acute where wage work had replaced subsistence farming and agricultural barter. The new breed of employers needed money of various types.15  Bank-created paper money thus served an important role in providing a medium of exchange when coins were either unreliable or unavailable.

This diminished the dependence on the sovereign’s coinage, and princes came to view these banks as troublesome competitors. Moreover, banks—unlike ordinary consumers—had the knowledge and the means to more carefully evaluate regime money and to accept devalued coins only at a discount.

Unhappy about the fact banks could often do an end run around the king’s coinage, states then sought to compel payments in metals, which the sovereign could more easily control. Glasner writes:

The tension between the state monopoly over coinage and private banking is manifested in legislation that was frequently enacted to restrict the creation of notes and deposits by banks. In the fifteenth century, for example, hostile legislation in the Low Countries … caus[ed] virtually all banking activity to cease.16

The downside of crippling a polity’s banking sector is sizable, so eventually the state abandoned this strategy and learned to love paper money. But getting the public to accept government-issued paper money would be a long uphill battle.

Van Creveld places the first government attempt at paper money in the 1630s, when the Spanish Duke of Olivares, in need for funds—yet again—for the Thirty Years’ War, confiscated silver and provided “interest-bearing letters of credit” in their stead. Given the reputation of princes for debasing the currency by this time, this paper money swiftly depreciated. Only a few years later, Sweden attempted a similar scheme, but this also quickly failed.

It was not until 1694 with the Bank of England—that is, after more than three hundred years of modern state building—that the foundations were laid for a true note-issuing central bank. And even then, the Bank of England did not begin as an institution that creates money and did not have a monopoly on issuing banknotes until 1844. Rather, the Bank of England initially financed the government deficit by issuing shares. These shares, not surprisingly, were very popular given the fact the bank also enjoyed a monopoly on government deposits.17

A national bank in France, the Banque royale, followed in 1718. But like the Bank of England, the Banque royale did not possess a functioning monopoly on issuing banknotes. This did not stop the French bank from printing a great many notes, however, and it did so, sparking a financial crisis in the wake of the Mississippi Bubble.

Central Banks and the Gold Standard

It was not until the nineteenth century that Europe’s states established and wielded the sorts of central banks and money-issuing powers that we now associate with state monopoly powers over monetary systems. According to Van Creveld, “By 1870 or so, not only had [central banks] monopolized the issue of notes in most countries but they were also beginning to regulate other banks.”18

The rise of these central banks throughout much of Europe provided states with unprecedented powers in terms of issuing new debt and financing explosive government spending in times of emergency. The regulatory role of central banks further solidified the regime’s control of their financial systems overall.

Ironically, however, it was also in the nineteenth century that states faced mounting opposition to state monopoly powers in the form of the classical gold standard.

This was a result of the rise of laissez-faire liberalism in the nineteenth century, which was especially notable in Britain, France, and the US. Increasingly in Western Europe, the liberals and the commercial class insisted, according to Glasner, on an “obligation to maintain the convertibility of gold or silver at a fixed parity.”19 These formal definitions of a currency’s value in metals were important in that they made it easier to see the extent and effects of government manipulation of the currency. That’s all to the good, but it offered no challenge to the state’s growing monopoly over money. After all, the gold standard could be—and repeatedly was—suspended for reasons of war.

In other words, it would be a mistake to regard the era of the classical gold standard as a period of state weakness in financial and monetary matters. On the contrary, the classical gold standard was built on a firm foundation of state power limited only by legislation. The legitimacy of the state’s prerogative to ultimately oversee the monetary system was not in question. By the end of the nineteenth century in Britain, and in many other key polities, the days of privately issued banknotes and privately minted coins were over. (The US lagged this trend somewhat, but the outcome was eventually the same.) That is, there were no institutions left that could realistically challenge the state in terms of issuing and creating money.

The nineteenth century did present obstacles to the state’s ability to inflate and debase the currency, but states nonetheless remained very much the victors over private money, private banks, and private mints. It should not surprise us that the classical gold standard was followed by the gold exchange standard, a system thoroughly dominated by state actors. The total abandonment of precious metals soon followed.

The Classical Gold Standard’s Role in sBuilding State Monetary Power. 

This will strike many libertarians and free-market advocates as an odd position to take. 

After all, throughout much of the past century, the idea of a gold standard for national currencies has been routinely linked with laissez-faire economics and “classical liberalism”—also known as “libertarianism.” It’s not difficult to see why. During the second half of the nineteenth century—as free-market liberalism was especially influential in much of Western Europe—it was the liberals who pushed for the adoption of the system we now know as the classical gold standard (CGS), which reigned supreme in Europe from approximately 1870 to 1914.

The liberals pushed for this change at the time for several reasons. The liberals believed that the CGS would facilitate globalization and international trade while reducing so-called transaction costs. The CGS also created a more transparent monetary system in the sense that national currencies were explicitly tied to specific amounts of gold. Moreover, the CGS eliminated the alleged inefficiencies of bimetallism.

Today, free-market liberals continue to be linked to the CGS—and to commodity-based money in general—because the CGS potentially limits the degree to which a state regime can debase the currency.

Yet it is also easy to overstate the degree to which the CGS can be described as laissez-faire or as a system that truly works against the interests of state power.

Rather, the classical gold standard was key in solidifying state control over national monetary systems. This was understood by the nationalists of the time, who viewed the gold standard as an instrument of increasing national prestige, sovereignty, and state power.

Although many liberals apparently hoped that the classical gold standard would render national currencies irrelevant in a truly globalized world, this did not happen. Instead, the CGS appears to have in many ways set the stage for what came later: Bretton Woods and floating fiat currencies. These two developments, of course, finalized total state control over national currencies. 

An analysis of these historical trends brings us to an important conclusion: it is not enough to wax nostalgic about the classical gold standard and seek a return to nothing more than gold-backed national currencies. Rather, the very idea of national currencies must be abandoned altogether, while embracing true currency competition and private commodity money.

The Classical Gold Standard: Better than Fiat Currencies, but Not Ideal

F.A. Hayek identified the central role of the state in the classical gold standard when he wrote in The Denationalisation of Money: “I still believe that, so long as the management of money is in the hands of government, the gold standard with all its imperfections is the only tolerably safe system. But we certainly can do better than that, though not through government.”20

In other words, a gold standard of the classical variety would clearly be an improvement over today’s status quo. But it is ultimately a monetary system that remains “in the hands of the state.”

So what is the ideal? Hayek concludes: “If we want free enterprise and a market economy to survive we have no choice but to replace the governmental currency monopoly and national currency systems by free competition between private banks of issue.”21

In order to understand this contrast between gold-backed national currencies and truly private money, it is helpful to look at the monetary situation that existed before the rise of the classical gold standard. This was not a period absent government intervention, of course. But it was a period during which true currency competition took place, albeit with government competitors thrown into the mix.

Before National Currencies and the Classical Gold Standard

Many of these earlier monetary milieus were very different from the nineteenth-century situation now generally known simply as “the gold standard.” Yet many opponents of fiat money today often fall into the error of labeling any sort of metal-based money as a gold standard.

This is quite typical in explanations of the history of money among both supporters and detractors of the use of commodity money. Consider an “educational” video titled “The Gold Standard Explained in One Minute“ which provides a fairly typical example of the problem. The video follows the usual timeline employed in these summaries of money’s history. It goes like this: thousands of years ago, people began minting gold coins. Then they put those coins in vaults. Then, in 1945, that ended with the Bretton Woods system. Then gold’s link to money was abolished altogether in 1971. Now we use fiat money. The end.

This is imprecise to say the least. Rather, most of monetary history is more accurately described as a decentralized system of competing banknotes and competing coins made of copper, silver, and gold. The issuance of banknotes was predominantly private—a practice pioneered by Italian bankers in the Middle Ages—until the nineteenth century.

As Eric Helleiner describes it, “Before the introduction of the gold standard, countries usually had rather heterogeneous and often quite chaotic monetary systems under which the state exercised only partial control.”22  Historically, coins could be minted by private mints or by mints granted government monopolies. But coins from a wide variety of jurisdictions often circulated freely within each polity. Moreover, the most frequently used coinage was often silver and not gold. In fact, much of the world from the sixteenth century to the nineteenth century was closer to being on a silver standard than a gold standard. An important example of this is the silver Mexican dollar which circulated freely in the Americas and in East Asia into the nineteenth century. It was not until the 1870s that the world abandoned Mexican dollars—and other types of silver monies—in order to embrace the emerging gold standard.

The Introduction of National Currencies Defined as a Certain Amount of Precious Metals 

As we saw earlier, there is an important distinction here to be made between a truly private monetary system of competing monies, and the system of national currencies. This is why Hayek just told us above that while the classical gold standard is better than our modern system of fiat currencies, it’s still not a true free market system. Hayek says we must get away from national currencies altogether. 

He’s right. And what are these national currencies? They are the currencies we now refer to by their national names. The US dollar. The British Pound. The French Franc. This idea of a national money was central to the system of what we now call the classical gold standard. But, this idea of a national currency was essentially a trick foisted on ordinary people by governments themselves. 

The rise of national currencies under the gold standard augmented state power in two ways. First, the CGS system helped accustom the public to using token money. Second, the consolidation of the national monetary systems under a single national currency solidified the power of central banks.

First, let’s look at the rise of token coins. Before the CGS, most coins that circulated were “full weight” coins in which the assigned value of the coin was equivalent to the value of the metals contained in the coin. With the rise of the CGS and national currencies, however, a key change took place. According to Helleiner, this was “the creation of a subsidiary ‘token’ coinage, that is, a coinage where the face value of lower denomination coins no longer derived from their metallic content but from a value assigned by the state vis-à-vis gold. To maintain their value, the supply of the token coins became closely managed by the state.”23

For example, in the year 1905, an American might carry around a ten-dollar gold coin with which he or she could make purchases. This person also might have a silver dollar. That silver dollar, however, was not equal to one-tenth the value of the ten-dollar gold piece in terms of its metal content. The silver dollar was a token money. Its value was assigned by a central bank or regime to correspond to a certain amount of the national currency.

Token coinage enabled the regime to simply create coinage out of metals that were far less valuable than the gold these coins represented. Secondly, the regime no longer had to deal with the problem of undervalued competing currencies being withdrawn from the marketplace, as often happened in the past. This was convenient for nearly everyone, since Europe had long been plagued by shortages of coins for small-scale payments and for the payment of wages. This problem became more acute as more people moved away from agriculture into industrial wage work. The availability of the state’s token coinage thus helped end the use of both foreign coins and full-weight coins.

As this token coinage came into daily usage, the public learned to use coinage in which the metal contents had little to do with the legally defined purchasing power. More importantly, the public learned to trust that the value of these coins—always denominated in national currencies like pounds and dollars—would be reliably managed by the regime.

Meanwhile, central banks began issuing banknotes, which grew increasingly distant from the underlying gold in the minds of most ordinary citizens. Martin van Creveld writes: “In theory any person in any of these countries was free to walk into the bank and exchange his notes for gold; except in London, though, those who had the nerve to try were likely to be sent away empty-handed whenever the sums in question were anything but trivial.”8

This, however, did not lead to runs on banks to convert banknotes into gold. Rather, ordinary people in domestic commerce learned to associate the regime’s paper money with gold, but without insisting on possessing the gold itself. More importantly, it was convenient to use paper money rather than to carry around heavy and bulky metal coins. As the public embraced this easy-to-use paper money, more and more of the gold supply flowed into bank vaults—including the all-important vaults of central banks.

In the early 1860s—during the period of bimetallism—the world’s specie supply was overwhelmingly in private hands.9 But this then began to change. Marc Flandreau writes:

Probably the most radical effect of bimetallism’s replacement by the Gold Standard was that it took the primary responsibility for managing the global monetary system away from private concerns. The uniformization of the monetary base meant that exchange rate stability could now be achieved by correctly behaved monetary authorities. The time was now ripe for central banks to commandeer an ever-increasing proportion of international bullion assets—a trend which accelerated after 1873.24

This increasing control also allowed regimes to put even more power in the hands of central banks Van Creveld writes:

Regardless of whether they were privately or publicly owned, originally each such [central] bank had been one note-issuing institute among many, albeit one that, serving as the sole haven for the state’s own deposits, led a charmed life that could hardly fail to grow at the expense of the rest. By 1870 or so, not only had they monopolized the issue of notes in most countries, but they were also beginning to regulate other banks. Given that the central banks’ reserves easily outstripped those of all the rest, it was inevitable that they should come to be treated as lenders of last resort.25

As central banks took over large-denomination banking, they also sought to even dominate smaller everyday transactions by issuing paper pocket change. This encouraged the public to keep even less gold on hand. Van Creveld continues: “As time went on the [central] banks of various countries vied with each other to see who could print the smallest notes (in Sweden, e.g., one-kroner notes, worth scarcely more than one British shilling, or $0.25, were issued), thus causing even more bullion to disappear into their own vaults.”26

This process of replacing gold and silver with things called shillings and kroner and dollars, by the way, was very important. Murray Rothbard saw this switch for what it was. In his book The Mystery of Banking Rothbard identifies how labeling precious metals as equivalent to some government currency denomination helped national governments pass off government currency as the same thing as gold. Rothbard writes:  

[I]f the kings could obtain a monopoly right to print paper tickets, and call them the equivalent of gold coins, then there was an unlimited potential for acquiring wealth. …

If the money unit had remained as a standard unit of weight, such as “gold ounce” or “gold grain,” then getting away with this act of legerdemain would have been far more difficult. But the public had already gotten used to pure name as the currency unit, an habituation that enabled the kings to get away with debasing the definition of the money name. 

The next fatal step on the road to chronic inflation was for the government to print paper tickets and, using impressive designs and royal seals, call the cheap paper the gold unit and use it as such. Thus, if the dollar is defined as 1/20 gold ounce, paper money comes into being when the government prints a paper ticket and calls it “a dollar,” treating it as the equivalent of a gold dollar or 1/20 gold ounce.

If the public will accept the paper dollar as equivalent to gold, then the government may become a legalized counterfeiter, and the counterfeiting process comes into play. 

Thus, we see the importance of affixing a new government affiliated name to some amount of gold. It has long allowed the state to manipulate money in a way that had not been previously possible. 

Moving Away from Gold Toward a Monometallic Gold Standard

This sleight of hand of renaming gold as some other currency unit, unfortunately, went hand-in-hand the system we now know as the classical gold standard. 

The next step was in defining these new currencies strictly in terms of gold, and abandoning the remaining elements of bimetallic (that is, gold and silver) money standards. David Glasner explains:

Although ancient currencies were made of precious metals, the concept of a formal monetary standard was an innovation of the eighteenth and nineteenth centuries. Before 1816 the pound had never been legally defined by Parliament as a specific weight of either gold or silver. From 1717 England had been on a de facto gold standard, but that standard was due to the undervaluation of gold relative to silver at the mint decreed by Sir Isaac Newton. This gold standard not due to a legal definition of the pound in terms of gold.27

Consequently, the British government discontinued free silver coinage in 1798 and adopted an exclusive de jure gold standard with 1816’s coinage act.

On the Continent, regimes gradually abandoned silver and bimetallism due to a series of market events and government interventions. Thanks to the relatively new practice of governments imposing a fixed ratio for the prices of gold and silver—as opposed to embracing free-floating market prices—this meant that either gold or silver was undervalued in relation to the other. The undervalued metal would then be hoarded rather than used as a general medium of exchange. Throughout the first half of the nineteenth century, a relatively high level of silver production, combined with a fixed ratio, meant gold was legally undervalued. Gold then disappeared into hoards and France, for instance, entered a de facto silver standard. But after the middle of the century, thanks in part to gold discoveries in Alaska and Australia, gold coins become both more numerous and relatively overvalued. This meant gold became the preferred medium of exchange and silver was hoarded or switched to nonmoney purposes. Many of the world’s regimes thus moved more rapidly toward a gold standard.

Embracing a gold standard was also useful in facilitating trade with Great Britain, the world’s economic powerhouse at the time. Residents of countries on a gold standard could more readily and easily trade with residents from other countries that were also on a gold standard.

By the 1860s, Switzerland, Italy, Belgium, and France formed a common currency bloc and moved increasingly toward a gold standard. In 1871, Germany switched to a gold standard as well, beginning the era of the classical gold standard throughout most of Europe. (The United States would follow suit in 1894.)

In this process, national governments were themselves very much involved. These regimes were able to manipulate the relative prices of gold and silver through policies governing the free minting of silver, while working to avoid situations that would result in large exports of gold.

Why National Governments Wanted the Gold Standard

The most important factor of this move to a gold standard lies less in the fact it was an embrace of gold per se, and more in the fact it constituted an embrace of a monometallic standard. In the political debate over monetary policy, both nationalists and liberals in the regime could see the benefits of this since, as Helleiner contends, “moving onto the gold standard was often seen as the key monetary reform that could lead to a more unified and homogeneous monetary order controlled by the state.”28

For the liberals, this meant simplifying economic calculation for bankers, merchants, and government agents. Under a monometallic gold standard it would not be necessary to deal with the potential confusion that comes with calculating real values in terms of both silver and gold. This also simplified international trade. Many liberals hoped this would move the world’s regimes toward a truly international monetary unit that abandoned national currencies altogether.

This internationalist view is key to understanding the liberal views on the value of the classical gold standard. But the nationalists and state builders took a view more connected to domestic politics. Helleiner writes: “Although economic liberals saw the gold standard in primarily economic and internationalist terms, nationalists saw it in a more domestic and political manner as useful for their goals of strengthening state power. And its control over the economy, cultivating a sense of collective national identity, and consolidating the internal economic coherence of the nation.”29

And then there were the advantages of the gold standard to the regime itself. The old order of competing currencies created uncertainties and higher transaction costs for the state in terms of tax collections and state surveillance of economic activity. The consolidated monetary order of the new gold standard reduced these costs for both the general public and the regime.

But, this system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: “[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.”30

The Unfortunate End Game: World War I

The ordinary consumer, of course, had no way of guessing where all this was headed: toward the end of gold convertibility in the face of the First World War. It was then that the gold-standard regimes realized they could cash in on all that trust they had gained during the period of the CGS. Once the war broke out, the façade of regime devotion to “sound money” immediately melted away. The gold standard had succeeded in growing state power over the issuance of banknotes, over coinage, and over physical control of specie. During the war, states became very interested in using that power to enrich themselves. Van Creveld concludes:

Within a matter of days [of the outbreak of war] all belligerents showed what they really thought of their own paper by taking it off gold, thus leaving their citizens essentially empty handed. Draconian laws were pushed through, requiring those who happened to own gold coins or bullion to surrender them. Next the printing presses were put to work and started turning out their product in previously unimaginable quantities.31

After fewer than forty-five years of Europe’s classical gold standard, the result was the seizure of gold, the empowerment of central banks, and money printing on a never-before-seen scale. These measures, of course, were all sold as “temporary,” and they were indeed temporary in the short term. But it all became permanent as the former regimes of the gold standard switched to the debauched “gold exchange standard” and then to the Bretton Woods system. It’s significant that when Franklin Roosevelt outlawed the private possession of gold in 1933 he relied on 1917 wartime legislation passed to severely limit the private use of gold.

A Political Problem, Not an Economic One

It is important to note, however, that the adoption of the CGA was a boon in terms of offering stable, reliable money that enhanced international trade. As Joseph Salerno has shown, attempts to blame the classical gold standard for depressions and economic calamities are baseless. Such were the economics of the move to a gold standard in the nineteenth-century that it coincided with “a century of unprecedented material progress and peaceful relations between nations.” 

Yet, as Hayek understood, the CGS represented a step away from true market competition in currency and toward currency nationalization and manipulation.When viewed through the lens of state building, we find many reasons why, in spite of ostensible limits placed by the gold standard on regime power, the ultimate effect of the CGS was state growth. The new state powers extended over the monetary system were justified by economic liberals and by economists on the grounds that these measures increased efficiency and standardization while reducing transaction costs. The ultimate outcome, however, has been anything but efficient.

The movement toward state controlled money over the past century is just part of a larger process of the state monopolization of  money. For the past 500 years, states have become increasingly bold in asserting total control over the money supply and the financial system in general. The classical gold standard was part of this process, although one that was certainly less than optimal from the state’s perspective. In the century since the decline of the gold standard, however, states have managed to gain almost total control of money, and this is not a power states will give up easily. 

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• 1 David Glasner, “An Evolutionary Theory of State Monopoly over Money,” in Money and the Nation State: The Financial Revolution, Government and the World Monetary System, ed. Kevin Dowd and Richard H. Timberlake Jr. (New Brunswick, NJ: Transaction Publishers, 1998), pp. 21–46, esp. p. 27.
• 2 Martin Van Creveld, The Rise and Decline of the State (Cambridge: Cambridge University Press, 1999), p. 226.
• 3 Ibid., p. 226.
• 4 John H. Munro, “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability” in International History Review 25, no. 3 (September 2003): 505–62, esp. 548.
• 5 Ibid.
• 6 Charles P. Kindleberger, “Economic and Financial Crises and Transformations in Sixteenth-Century Europe,” in Essays in History: Financial, Economic, Personal (Ann Arbor: University of Michigan Press, 1999), pp. 72–94, esp. p. 75.
• 7 Ibid.
• 8 Ibid., p. 6.
• 9 Ibid., p. 6.
• 10 Kindleberger, “Economic and Financial Crises and Transformation in Sixteenth-Century Europe,” p. 76.
• 11 Jan Sytze Mosselaar, A Concise Financial History of Europe (Rotterdam: Robeco, 2018), p. 53.
• 12 Ibid., p. 54.
• 13 Van Creveld, The Rise and Decline of the State, p. 226.
• 14 Kindleberger, “Economic and Financial Crises and Transformations in Sixteenth-Century Europe,” p. 87.
• 15 T.S. Ashton, The Industrial Revolution: 1760–1830 (New York: Oxford University Press, 1964,) pp. 69–70.
• 16 Glasner, “An Evolutionary Theory of State Monopoly over Money,” p. 28.
• 17 The bank was created as a result of the financial crisis of 1672 during which—in spite of the advantages of the state’s longtime monopoly on coinage—Charles II suspended altogether the payment of coins to his creditors. He eventually paid his debts, but the episode raised calls for the creation of a “public” bank that would lower risk and guarantee the payment of the government’s debts.
• 18 Van Creveld, The Rise and Decline of the State, p. 233.
• 19 Glasner, “An Evolutionary Theory of State Monopoly over Money,” p. 38.
• 20 F.A. Hayek, The Denationalisation of Money—the Argument Refined (London: Institute of Economic Affairs, 1976), p. 131.
• 21 Ibid.
• 22 Eric Helleiner, “Denationalising Money? Economic Liberalism and the ‘National Question’ in Currency Affairs,” in Nation-States and Money: The Past, Present and Future of National Currencies, ed. Emily Gilbert and Eric Helleiner (Oxford: Routledge, 1999), p. 140.
• 23 Helleiner, ”Denationalising Money?,” p. 142.
• 24 Marc Flandreau, The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848–1873 (New York: Oxford University Press, 2003), p. 214.
• 25 Martin van Creveld, The Rise and Decline of the State (Cambridge: Cambridge University Press, 1999), p. 233.
• 26 Van Creveld, Rise and Decline of the State, p. 233.
• 27 David Glasner, “An Evolutionary Theory of State Monopoly over Money,” in Money and the Nation State: The Financial Revolution, Government and the World Monetary System, ed. Kevin Dowd and Richard H. Timberlake Jr. (New Brunswick, NJ: Transaction Publishers, 1998), p. 38.
• 28 Helleiner, “Denationalising Money?,” p. 140.
• 29 Helleiner, ”Denationalising Money?,” p. 145.
• 30 Flandreau, The Glitter of Gold, p. 214.
• 31 Van Creveld, Rise and Decline of the State, p. 234.

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