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2.2 Establishment of the International Gold Standard ( 1871- 1900)
Germany was created as a unified country following the Franco-Prussian War; it established the Reichmark , went on to a strict gold standard, and used gold mined in South Africa to expand the money supply. Rapidly most other nations followed suit, since gold became a transportable, universal and stable unit of valuation. See Globalization.
Dates of Adoption of a Gold Standard:
Throughout the decade of the 1870s deflationary and depressionary economics created periodic demands for silver currency. However, such attempts generally failed, and continued the general pressure towards a gold standard. By 1879, only gold coins were accepted through the Latin Monetary Union, composed of France, Italy, Belgium, Switzerland and later Greece, even though silver was, in theory, a circulating medium.
By creating a standard unit of account which was easily redeemable, relatively stable in quantity, and verifiable in its purity, the gold standard ushered in a period of dramatically expanded trade between industrializing nations, and "periphery" nations which produced agricultural goods - the so called "bread baskets". This "First Era of Globalization" was not, however, without its costs. One of the most dramatic was the Irish Potato Famine, where even as people began to starve it was more profitable to export food to Britain. The result turned a blight into a humanitarian disaster. Amartya Sen in his work on famines theorized that famines are caused by an increase in the price of food, not by food shortage itself, and hence the root cause of trade based famines is an imbalance in wealth between the food exporter and the food importer.
At the same time it caused a dramatic fall in aggregate demand, and a series of long Depressions in the United States and the United Kingdom. This should not be confused with the failure to industrialize or a slowing of total output of goods. Thus the attempts to produce alternate currencies include the introduction of Postal Money Orders in Britain in 1881, later made legal tender during World War I, and the " Greenback" party in the US, which advocated the slowing of the retirement of paper currency not backed by gold.
By encouraging industrial specialization, industrializing countries grew rapidly in population, and therefore needed sources of agricultural goods. The need for cheap agricultural imports, in turn, further pressured states to reduce tariff barriers, so as to be able to exchange with the industrial nations for capital goods, such as factory machinery, which were needed to industrialize in turn. Eventually this pressured taxation systems, and pushed nations towards income and sales taxes, and away from tariffs. It also produced a constant downward pressure on wages, which contributed to the "agony of industrialization". The role of the gold standard in this process remains hotly debated, with new articles being published attempting to trace the interconnections between monetary basis, wages and living standards.
By the 1890s in the United States, a reaction against the gold standard had emerged centered in the Southwest and Great Plains. Many farmers began to view the scarcity of gold, especially outside the banking centers of the East, as an instrument to allow Eastern bankers to instigate credit squeezes that would force western farmers into widespread, leading to a consolidation of western property into the hands of the centralized banks. The formation of the Populist Party in Lampasas, Texas specifically centered around the use of "easy money" that was not backed by gold and which could flow more easily through regional and rural banks, providing farmers access to needed credit. Opposition to the gold standard during this era reached its climax with the presidential campaign of Democrat William Jennings Bryan of Nebraska. Bryan argued against the gold standard in his Cross of gold speech in 1896, comparing the gold standard (and specifically its effects on western farmers) to the crown of thorns worn by Jesus Christ at his crucifixion. Bryan ran and lost three times, each time carring mostly Southern and Great Plains states.
