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The Gold Standard in Forex

In the early 20th Century, in Britain, the pound was equal to 113 grains, a quantity large enough to make a coin, known as the pound or sovereign, that was not too small for use; in fact, half-sovereigns were also made.

In other countries where the number of grains was much smaller, gold coins contained five, ten, or more units (francs, marks, dollars, etc.). The coins were in general circulation; men carried them in special compartments of their purses, or in small metal containers on the end of a watch chain, and supplies could be obtained, on demand, at any bank.

To most people that was all the gold standard meant, but to businessmen it might mean much more. Bullion was turned into coins freely and free of charge by the mints. Coins could be melted down if anyone wished to do so.

Coin or bullion could be exported, and any debtor, buyer, or person who wished to deposit, or invest money, in a foreign land, was free to ship metal if they found it cheaper to do this than to buy a bill of exchange or draft. If they did send gold, they knew that a sovereign was worth $4.87 in New York, 25.22 francs in Paris, or 20.43 marks in Berlin, since this was the "Mint Par of Exchange," the value of 113 grains, in foreign units of account.

In practice it rarely was cheaper to send metal, for there was an international gold standard, as well as a domestic one, with London as its financial center and clearinghouse.

Through its operations each country could receive payment for its exports, pay for its imports, receive or send capital investments, borrow or lend for short term, payor receive interest, dividends, shipping charges, and insurance premiums, or carry out any other kind of monetary transaction, without much movement of gold.

There were always men in London who held claims on money in foreign cities, just as there were men in every foreign city who had claims on London. The former were willing to sell theirs (in bills or drafts) to those who needed money in a foreign currency to pay their debts to the latter.

The sale price, the rate of exchange, was usually so near the Mint Par of Exchange that the cost plus postage was below that of packing, insuring, and shipping gold. If, however, the demand for claims exceeded the supply, the rate of exchange might rise so high that shipment would be as cheap, or cheaper, and also would be necessary to cope with the excess of demand.

When this happened, or when any other influence caused a serious drain on London's gold supply, the raising of the Bank rate and other steps brought enough gold back to restore the metal foundation for notes and credit to satisfactory strength. But no gold standard, domestic or international, could stand up under the burden of a world war.