The Golden Era - The British Empire & Sound Money between 1816 - 1914
2 Key Reasons why Britain adopted the gold standard as well as 4 advantages and 4 disadvantages!
Today’s post is going to dive into the history of Britain and specifically look at the Golden Era between 1816 - 1914. This was a time when the sun never set on the British Empire and, because of sound monetary policy, inflation was relatively non-existent.
We will explore:
2 key reasons for Britain going back onto a gold standard
2 key laws that were enacted
Inflation figures throughout the era
4 advantages of the gold standard and this era
4 disadvantages of the gold standard and this era
Results and lessons
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Let us start at the beginning and ask this question. Why did Britain decide to adopt a gold standard in the first place?
There are 2 Key Reasons why Britain adopted a Gold Standard.
The Napoleonic Wars (1803–1815) had disrupted Britain’s economy (just like all war does) and this led to the suspension of gold convertibility in 1797. The BoE then issued paper currency (i.e. Banknotes) that were not backed by gold. This caused inflation and currency depreciation. Confidence in the currency and price stabilisation was needed. Therefore, after the wars ended, Britain looked to do this by going onto a gold standard.
David Ricardo (famous British economist and politician) believed that pegging the currency to gold would limit the supply growth of the currency. This would therefore help to prevent excessive inflation and would hopefully achieve long-term price stability. Given his way with words and his position in parliament, it is no surprise that his words held sway with others.
The Coinage Act of 1816 saw the gold standard formally put into place and the Bank Charter Act of 1844 further strengthened the gold standard by implementing regulations on paper currency issuance.
Overview of The Coinage Act of 1816
The Act defined the British currency in terms of gold.
The sovereign (£1 gold coin) was introduced. This weighed 7.988 grams of 22-carat gold (91.6% pure gold)
Silver coins (i.e. shillings) were issued yet their value was not based on the metal content
£1 was set at 113.001 grains of pure gold. This created a fixed exchange rate for the pound. This was crucial to the overall stability moving forwards and replaced the old bimetallic standard with a pure gold standard.
Overview of The Bank Charter Act of 1844 aka Peel’s Bank Charter Act 1844
The Act required that every Bank of England note above a certain amount be backed by sufficient gold reserves.
It helped to prevent excessive currency printing by ensuring that there was a tight link between the paper currency and gold.
It gave the Bank of England a monopoly on issuing banknotes in England and Wales.
France was knackered fiscally and economically after the Napoleonic Wars & Spain was too. As a result of all of this, Britain emerged as the world’s leading economic power. The adoption of the gold standard helped international trade prosper. This was because an exchange system based on gold made it easier for trade.
The Industrial Revolution helped to further exacerbate success during this period.
I asked ChatGPT to break down the 1816 - 1914 era and to also provide inflation figures for the period whilst putting the information in an easy-to-read table.
Inflation Figures During the Gold Standard (1816–1914)
The reason for putting 1914 as the finishing point is that when World War I broke out, Britain suspended gold convertibility in order to help finance the war.
This meant that the government issued unbacked currency and borrowed heavily. This helped to break the link between the pound and gold.
Britain did briefly return to a slightly modified gold standard in 1925 but then subsequently abandoned it permanently in 1931 due to the Great Depression.
Using the handy chart from Chat GPT, let us now have a look at these timeframes within the 1816 - 1914 era itself.
1816 - 1820
This was right after the Napoleonic Wars had ended. The UK endured a deep recession and encompassed issues such as the Peterloo Massacre of 1819
The formal adoption of the gold standard in 1816 led to tight money supply and falling prices.
Inflation rate = -2% to -5% per year (deflation).
Effects = Stagnating wages, struggling businesses, people demanding reform & debt became harder to repay.
1820 - 1850
The Industrial Revolution boosted productivity and enabled a good trade surplus to exist. Queen Victoria ascended the throne in 1837 (which ushered in the Victorian Era) and improved transportation (railways, steamships etc) lowered costs of goods and increased productivity.
Inflation rate = -1% to +0.5% per year (low inflation or mild deflation).
Effects = The UK became the world's leading industrial power and economic/financial force.
1850 - 1873
One major disadvantage of being on a gold standard occurred and this was the dramatic increased in the global supply of gold thanks to both the gold rushes of California (1848–1855) and Australia (1851).
This increase in gold supply meant more currency in circulation, which resulted in inflation.
Inflation rate = +0.5% to +2% per year.
Effects = Wages and prices rose consistently but overall economic growth and financial power kept these increases (and inflation) in check.
1873 - 1896
After years of the gold supply increasing, it decreased in this period. This caused prices to fall consistently, causing a steady deflation. Good for most consumers but bad for debtors.
This period also saw an overproduction in agricultural products and industrial expansion and improvements in efficiency (more railways, better transport) further decreased prices.
Inflation rate = -0.5% to -2% per year (deflation).
Effects = Farmers and debtors suffered. Debts became harder to repay. Very good for the overall consumer though!
1896 - 1914
More economic growth and a move towards globalisation helped to stabilise prices. Very mild inflation occurred throughout this period due to an increase in gold production in South Africa. Queen Victoria died in 1901 and Britain transitioned into the Edwardian Era.
Inflation rate = +0.5% to +1% per year (mild inflation).
Effects = The British economy was strong, with stable wages and rising living standards.
4 Advantages of the gold standard
The gold standard delivered remarkable price stability over the century.
Relatively low inflation throughout the century too
Thanks to most of Europe also being in the doldrums, the gold standard helped Britain to achieve economic dominance and global financial leadership.
A Trade Surplus meant that thee UK maintained strong exports, bringing in more gold
4 Disadvantages of the gold standard
No system is perfect and there were a couple of limitations with the gold standard.
The currency supply was limited by gold reserves, making it difficult to respond to economic shocks i.e. the 1866 Overend Gurney Crisis
In times of crisis, the Bank of England had to raise interest rates to stop gold outflows, which often worsened economic downturns, yet history would suggest that this was the right thing to do!
If new gold sources were discovered, inflation could rise (see 1850-1873 above)
If gold supply was tight, it could cause deflation (see 1873-1896 above)
What can we take away from this era?
We can learn a lot of lessons from the gold standard and the history surrounding it.
When we look back at this era of the gold standard then everything seems quite serene. Britain was an economic superpower (not quite so today) and it also had the worlds reserve currency (USD today) and its geography helped it in terms of managing the seas at the time.
We would probably love to have deflation or even very mild inflation today. The truth is that we are on a very slippery slope at present.
It has to be noted that the Napoleonic Wars lead to currency issues and that the gold standard was adopted as a result of fiscal change/out of sheer necessity. Something similar could happen in the years ahead.
World War I saw countries temporarily come off of the gold standard and get the printing presses going. This helped to finance World War I but also helped to destruct the respective currencies.
The gold standard was not perfect and its relative rigidity meant that economic shocks could not always be easily dealt with i.e. The Overend-Gurney Financial crisis of 1866
That being said, the long period of overall financial and economic stability was the result of the gold standard and partly due to other factors at the time i.e. France + Spain were ravaged and ruined by war and revolutions.
Britain took advantage and well and truly prospered. The Victorian Era (1837 - 1901) is widely regarded as one of the most successful and prosperous eras that Britain (and quite possibly the world) has ever seen.
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Nice read!
Loved this bit of history. Very interesting read. Where can I find your info on gold - you suggest researching before buying; which podcast is this please?