Reflections on the Monetary History of the West – 1700-1974

By 1700, the banking system of Europe had elaborated the institutions of money and credit we know today. And England had taken the lead. For almost 200 years, from 1717 until the onset of World War I in 1914, the British pound sterling, a weight unit of metallic money, set the example for modern monetary systems. Significantly, standard British money was called the pound. Equally important the English word money comes from the Latin word moneta, meaning literally coin or mint. Money is coin minted currency. Historic standard money of the Western world in general was coined metal. And in particular the standard unit of coin in England was the pound sterling, a pound weight of metal.

The pound of precious metal would be “monetarized” by coining from its contents the standard unit money (coins) in circulation. Within a nation or community, the issuance of such money could never exceed the quantity of precious metal imported or mined – and, therefrom, minted into the standard units of coin such as the pound in England. But also, the value of mined and imported monetary metals in the community (i.e., money) was approximately equal to the value of all the products and services created in the community against which the monetary metals were exchanged. Thus, the quantity of (coined) money in circulation was always in reasonable balance with the quantity of goods and services produced in the economy of such a community. Under such a naturally balanced monetary system, there could be no great excess of money. Thus, there could be no great inflation. Nor could there by any “shortage” of money. Each producer made a supply of goods in the market for money, the quantity of which was determined by the amount mined or imported and then coined for those who desired to hold it instead of goods. Thus, there could be no great deflation caused by insufficient money because the community produced or imported the coin, or money, it desired to hold. The money prices of goods fluctuated, but workers got the money they desired to exchange for their labor. It is true that prices gradually rose when large, new discoveries amplified the quantity of monetary metal on the market. Such an example occurred during the 16th century known to historian as “The Price Revolution.” But the average rise in the price level during this period, contrary to conventional wisdom, was about three percent, a veritable age of stability compared to our own. It is also true that the price level gradually declined during periods of diminished rates of discovery of the monetary metals. Such a period was the late 19th century in the United States, known to some historians as “The Great Deflation.” But the average decline in the price level during this period never exceeded 2 percent and this fall in the price level was associated with one of America’s greatest periods of economic growth. Compared to the Great Depression of 1930-1933, caused by protectionism, trade barriers, war preparations and central bankers, the monetary deflation of 1870-1900 was but a gentle decline amidst economic expansion.

It was also no accident that the historic monetary unit of the Western world was a definite weight of a real article of wealth. The English currency took its name from the pound weight of precious metal which was the customary unit of value at the town of Sterling in Anglo-Saxon England. It is true that the metallic monetary unit, even in medieval Europe, never contained the precise weight indicated by its name. In addition, the weight measures of money actually varied from locality to locality and were arbitraged in market places by money changers. But the monetary unit, the measuring rod of value during the commercial and industrial revolutions was nevertheless, always a true weight unit of bullion or coin. Intentively, a weight unit of money enabled its users to compare the value (or “weightiness”) of goods and services against the proportions of value contained by the different weights of national and local monetary units. Coined money, whatever its origin, had the earmarks of a universal standard of economic value.

Even more important was the fact that a specific weight unit, not an empty abstraction, had emerged as the concrete standard of economic value; or, in other words, of the weightiness of other goods. And just as the inch is a unit of length, designed best to measure distance, so the unit weight was freely selected in the market as the best measure of economic value. Just as the true yardstick cannot vary from the prescribed length of 36”, or all length measurement must break down in chaos; so the community of wealth producers decided upon a monetary unit of fixed value by weight, in the absence of which, the measurement of economic value would become unreliable and break down.

Now, the reason a unit of weight, emerged as the measuring rod of economic value is very simple. Economic exchange is uniquely human activity. Wealth consists of the real products and services offered in the market, which originate in human action. Wealth is created by human intelligence and effort. Historic money, i.e., metallic money, was also a real article of wealth produced for the market. It was desired for beauty, ornament, and endurance. But metallic must be measured by weight. The pound coined at eSterling measured the amount of intelligence and effort and capital (saved effort) required to produce a certain quantity of metal which could be exchanged against other goods in the market. All goods require for their production a certain amount of intelligence, effort and capital; therefore, a proportionality, or underlying relationship of value among all goods, must be measured best by a unit of measure which is common to all these goods. Such is the weight unit of precious and desirable articles of wealth which can only be produced by the application of a relatively constant amount of human intelligence, effort, and capital. The market discovered over centuries, that a weight of gold metal, as we shall discuss later, exhibited the property of constant value better than all other potential and competing monetary standards. Thus, the value of human economic activity came to be measured by a constant weight unit of gold. The historic standard of economic measurement is still a gold weight. Thus did the gold standard become the unvarying yardstick of commercial civilization in the west and as we shall see, characterized its longest periods of expansion, peace, and price level stability.

The historic pound sterling was divisible by law and practice into weight units of gold and silver money. Paper pound notes, or bank notes were issued and redeemable, as we know, into their equivalent weight in gold. By the early 19th century checks, or deposit withdrawals, drawn on the expanding demand deposits of the sterling banking system were acceptable throughout the commercial world. Acceptability was insured by redeemability in English bank notes and also into gold coin or money, a money which under British leadership had become the acknowledged world money. In a way, because gold money was the optimum monetary standard and because English money was primarily gold based, and moreover England dominated world commerce, gold rapidly became the world currency. The integrated and expanding industrial world economy of the 19th century was, above all, based on its common, efficient currency. Western capitalism comprised a family of competing nations with a global and impartial monetary system, the gold standard, the elaboration of which had developed in parallel with the industrial revolution. Their coincident occurrence was not fortuitous. Throughout history, a sound and efficient money had accompanied the development of an ordered and growing exchange economy. It was no accident that the destruction of stable money in ancient Greece and Rome brought inflation, price and wage controls, rationing, tyranny, decline and fall. The process for debasement occurred over centuries, but the hindsight of the historian shows the unassailable link of depreciating money and a doomed civilization.


Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff

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