The Gold Standard: Isaac Newton's Math Error That Ruled World Money

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The gold standard is remembered as the model of financial discipline, yet no one designed it. In 1717 Isaac Newton, master of the Royal Mint, fixed one gold guinea at 21 silver shillings. The ratio overvalued gold compared with mainland Europe, so merchants brought gold into Britain, bought silver cheaply, and shipped it abroad for profit. Silver drained out of the country, and Britain ended up on gold by accident.

This episode explains how that accident became a global rule and why the world gave it up. It covers the centuries when silver did the daily work of commerce, France's role as the balancing weight of a two metal system, and the Franco-Prussian War indemnity that let Germany launch the gold mark. It then turns to the Great Depression, when defending gold reserves meant raising interest rates into a banking panic, and to Bretton Woods and its end in 1971.

• In 15th century England a skilled artisan earned about six pence a day, while one small gold ducat was worth 40 pence, far too much for everyday purchases.
• After defeating France, Germany extracted an indemnity of five billion gold francs, more than 1,400 metric tons of gold, and used it between 1871 and 1873 to replace regional silver currencies.
• In Lubeck in 1877 authorities found 20 mark gold coins being shaved just enough to pass public weight checks, one reason central banks moved gold into vaults and issued convertible paper.
• Britain suspended gold in 1931, and the United States followed in 1933 and 1934, when Franklin D. Roosevelt devalued the dollar by over 40 percent against gold.
• Bretton Woods pegged the dollar at $35 per ounce in 1944 until Richard Nixon suspended convertibility in 1971. In a 2012 survey, 92 percent of economists said a return to gold would not improve price stability or employment.