1. From monopoly to monetary diversity

1.1. Introduction to money

1.1.3. The gold standard and symbolic money

For a long time, the value of money was represented by gold. That is to say, each banknote symbolized a certain amount of gold which the central bank of each country held in reserve. This was known as the “gold standard”.

When the gold standard is respected, paper money cannot be issued in large quantities. As a result, increased production is held in check and leads to unemployment, or else prices drop and profits are reduced accordingly. To overcome this difficulty, the banks centralized the supply of credit in each country, explaining from the outset that the symbolic currency was created to rescue trade from forced deflation by increasing the volume of business activity. Gold may not have been suitable as a currency for domestic purposes, but the symbolic currency was not able to circulate abroad and therefore the gold standard was still necessary for international trade. This is why, since the beginnings of the market system, two types of money have been necessary: one for international trade (gold), and another for each country’s domestic trade.

In spite of the resources invested to avoid deflation, the gold standard led to the perpetual disruption of business activity and mass unemployment: when articles were imported and had to be paid in cash money, sales of domestic products dropped and so did prices. The gold standard could not be sustained by the very nations it was supposed to serve, since the abrupt changes in price levels would have wreaked havoc on all business activity. The symbolic national currency was therefore the safeguard, with the central bank acting as a buffer between the domestic and external economies. The banker therefore had the dual task of ensuring sound domestic finances and the external stability of the currency.

There was an attempt to return to the gold standard after the First World War, but in 1931 Great Britain finally abandoned all pretensions of linking its currency to its metal reserves. The gold era and the glory days of the Bank of England were over. The financial crisis of 1929 exposed the fact that the gold standard – the self-regulating market that included land, labour and money, world trade and financial stability, complemented by migration laws and customs tariffs – was, generally speaking, a misguided policy that contradicted the principles of economic theory. Tensions went beyond the economic sphere and stability had to be restored by political means. A choice had to be made between, on the one hand, a stable currency and healthy public finances, with the attendant reduction of social services; and, on the other, a deflated currency, which would enable a country to improve its social services, but would effectively remove it from the international economic game, as a consequence of the drop in its exchange rate. Most countries chose the first option, with destructive consequences for popular policies.