D.H. Robertson on Why the Gold Standard after World War I Was Really a Dollar Standard

In a recent post, I explained how the Depression of 1920-21 was caused by Federal Reserve policy that induced a gold inflow into the US thereby causing the real value of gold to appreciate. The appreciation of gold implied that, measured in gold, prices for most goods and services had to fall. Since the dollar was equal to a fixed weight of gold, dollar prices also had to fall, and insofar as other countries kept their currencies from depreciating against the dollar, prices in terms of other currencies were also falling. So in 1920-21, pretty much the whole world went into a depression along with the US. The depression stopped in late 1921 when the Fed decided to allowed interest rates to fall sufficiently to stop the inflow of gold into the US, thereby halting the appreciation of gold.

As an addendum to my earlier post, I reproduce here a passage from D. H. Robertson’s short classic, one of the Cambridge Economic Handbooks, entitled Money, originally published 92 years ago in 1922. I first read the book as an undergraduate – I think when I took money and banking from Ben Klein – which would have been about 46 years ago. After seeing Nick Rowe’s latest post following up on my post, I remembered that it was from Robertson that I first became aware of the critical distinction between a small country on the gold standard and a large country on the gold standard. So here is Dennis Robertson from chapter IV (“The Gold Standard”), section 6 (“The Value of Money and the Value of Gold”) (pp. 65-67):

We can now resume the main thread of our argument. In a gold standard country, whatever the exact device in force for facilitating the maintenance of the standard, the quantity of money is such that its value and that of a defined weight of gold are kept at an equality with one another. It looks therefore as if we could confidently take a step forward, and say that in such a country the quantity of money depends on the world value of gold. Before the war this would have been a true enough statement, and it may come to be true again in the lifetime of those now living: it is worthwhile therefore to consider what, if it be true, are its implications.

The value of gold in its turn depends on the world’s demand for it for all purposes, and on the quantity of it in existence in the world. Gold is demanded not only for use as money and in reserves, but for industrial and decorative purposes, and to be hoarded by the nations of the East : and the fact that it can be absorbed into or ejected from these alternative uses sets a limit to the possible changes in its value which may arise from a change in the demand for it for monetary uses, or from a change in its supply. But from the point of view of any single country, the most important alternative use for gold is its use as money or reserves in other countries; and this becomes on occasion a very important matter, for it means that a gold standard country is liable to be at the mercy of any change in fashion not merely in the methods of decoration or dentistry of its neighbours, but in their methods of paying their bills. For instance, the determination of Germany to acquire a standard money of gold in the [eighteen]’seventies materially restricted the increase of the quantity of money in England.

But alas for the best made pigeon-holes! If we assert that at the present day the quantity of money in every gold standard country, and therefore its value, depends on the world value of gold, we shall be in grave danger of falling once more into Alice’s trouble about the thunder and the lightning. For the world’s demand for gold includes the demand of the particular country which we are considering; and if that country be very large and rich and powerful, the value of gold is not something which she must take as given and settled by forces outside her control, but something which up to a point at least she can affect at will. It is open to such a country to maintain what is in effect an arbitrary standard, and to make the value of gold conform to the value of her money instead of making the value of her money conform to the value of gold. And this she can do while still preserving intact the full trappings of a gold circulation or gold bullion system. For as we have hinted, even where such a system exists it does not by itself constitute an infallible and automatic machine for the preservation of a gold standard. In lesser countries it is still necessary for the monetary authority, by refraining from abuse of the elements of ‘play’ still left in the monetary system, to make the supply of money conform to the gold position: in such a country as we are now considering it is open to the monetary authority, by making full use of these same elements of ‘play,’ to make the supply of money dance to its own sweet pipings.

Now for a number of years, for reasons connected partly with the war and partly with its own inherent strength, the United States has been in such a position as has just been described. More than one-third of the world’s monetary gold is still concentrated in her shores; and she possesses two big elements of ‘play’ in her system — the power of varying considerably in practice the proportion of gold reserves which the Federal Reserve Banks hold against their notes and deposits (p. 47), and the power of substituting for one another two kinds of common money, against one of which the law requires a gold reserve of 100 per cent and against the other only one of 40 per cent (p. 51). Exactly what her monetary aim has been and how far she has attained it, is a difficult question of which more later. At present it is enough for us that she has been deliberately trying to treat gold as a servant and not as a master.

It was for this reason, and for fear that the Red Queen might catch us out, that the definition of a gold standard in the first section of this chapter had to be so carefully framed. For it would be misleading to say that in America the value of money is being kept equal to the value of a defined weight of gold: but it is true even there that the value of money and the value of a defined weight of gold are being kept equal to one another. We are not therefore forced into the inconveniently paradoxical statement that America is not on a gold standard. Nevertheless it is arguable that a truer impression of the state of the world’s monetary affairs would be given by saying that America is on an arbitrary standard, while the rest of the world has climbed back painfully on to a dollar standard.


12 Responses to “D.H. Robertson on Why the Gold Standard after World War I Was Really a Dollar Standard”

  1. 1 am December 18, 2014 at 2:39 am

    Hoarded by the nations of the East. Written 92 years ago but still the same. Every Indian Father gives his daughter some gold on her wedding day. It is not for decoration but for the worst rainy day. I read, though I cannot recollect where, of gold as a means of exchange in Cambodia, during the times of Pol Pot and his murders. I wonder if this predilection for gold is anything to do with the instability of domestic currencies in the East or just lack of trust. A person who buys it in the East is not regarded as daft by people in the East.


  2. 2 Nick Rowe December 18, 2014 at 5:10 am


    I read Robertson’s book “Money” as a grad student, but must have missed that passage, or it never sunk into my brain.


  3. 3 JMRJ December 18, 2014 at 6:07 am

    “Nevertheless it is arguable that a truer impression of the state of the world’s monetary affairs would be given by saying that America is on an arbitrary standard, while the rest of the world has climbed back painfully on to a dollar standard.”

    Well, if the point is that when one very large country goes on a gold standard it forces other countries, as a practical matter, to do the same I would of course find that completely agreeable.

    The dollar price of gold can be set at will by the monetary authority, whether government proper or federal reserve. There would be reasons, of course, for setting it at this level or that. In any case, as I recall from my studies of the post WWI period the biggest problem was that the price was set too low in England.

    If the US were to return to a gold standard now, the dollar price would have to be north of $30K per ounce. I figured that all bank deposits and all currency would have to be covered by the gold presently on hand.

    I assume with the dollar price of gold being so dear, there would be a mad rush into the gold producing business. Which would mean the money supply would rapidly increase, at least at first. Then I figure only the government will be a gold buyer because no one else could afford it. Then the government can charge a high rate of “seigniorage” to fund itself.

    And so on, as Kurt Vonnegut used to write.

    I’m interested in any criticisms or critiques of these notions. There’s a lot of uncharted territory. If anyone wants to read more:


    Just as a last thought, I had coupled a return to a gold standard with a complete debt jubilee, a moratorium on taxation, and perhaps somewhat interesting to readers here, a moratorium on residential evictions for non-payment. I have since entertained the thought that the moratorium on evictions for non-payment would be permanent.

    Again, I appreciate the thoughtful discussion over here.


  4. 4 JP Koning December 18, 2014 at 10:07 am

    Would you say that a free banking gold standard would be akin to many small countries on the gold standard?

    If so, one of the advantages of a free banking system is it never runs into the sorts of problems that might be created by having a large country on the gold standard (ie the Insane Bank of France or the Strong-less Fed).


  5. 5 Nick Rowe December 18, 2014 at 10:32 am

    JP: I was wondering the same thing myself.

    My (tentative) answer: if all the small banks/countries decided, at the same time, to hold more gold reserves, we would get much the same global deflation as if one large bank/country decided to hold more gold.

    No one small bank can manipulate the real price of gold, but we can still get the same instability in the real price of gold. Especially in a bank run.


  6. 6 Jim December 18, 2014 at 11:56 am

    some random thoughts and questions:

    how much was the United states “reserved” during that post WW1 era? anything less than 100% is akin to fractional reserve banking? and this implicitly requires trust…ie the dollar standard that OP is talking about?

    regarding moving to 100% reserves (whether at central bank or private bank under free banking), main idea is to go slowly, no? like deleverging banks…if you go from “30 to 1” leverage to “1 to 1” with a few months time, you have massive deflation. If you make the transition over 10+ years, possible to do it without major crisis?


  7. 7 David Glasner December 18, 2014 at 6:11 pm

    am, Yep, it’s true, they go gaga for gold in south and east Asia. I will not try to explain why.

    Nick, I know that I did not pick up on that point on my first read of Robertson. It was probably only after Earl Thompson explained to me how the gold standard works that I could understand what Robertson was actually saying.

    JMRJ, The US did not force any country to go on the gold standard. For the most part, countries went back on the gold standard because they thought, at the time, that the gold standard was the key to economic and financial stability. That turned out to be a big mistake. Many people think that the biggest problem with the interwar gold standard was the Britain went back to the gold standard at the old prewar dollar-sterling parity. That’s totally wrong. Overvaluing the pound helped cause unemployment in Great Britain to stay higher than it should have for most of the 1920s. That was Britain’s problem; it had little to do with causing the Great Depression. The Great Depression was caused by the insane Bank of France and the clueless (after Benjamin Strong was incapacitated by illness) Federal Reserve System.

    JP Many free banks on a gold standard might collectively have a higher demand for gold than a single central bank because of economies in centralizing the holding of reserves. In addition, the demands of the individual banks for gold reserves might be highly correlated, causing large swings in the demand for gold in a big country with a lot of free banks on the gold standard. I think I discuss that possibility in my book.

    Nick, Yes, I agree with your tentative answer.

    Jim, Sorry, I don’t remember the specifics of the gold reserve requirements in the US under the gold standard, but I don’t think that they were ever 100% reserve requirements. The reserve requirement has nothing to do with whether the gold standard was really a dollar standard. Banknotes were not the only form of money; there are also bank deposits. There was no gold reserve requirement on bank deposits. I didn’t mention 100% reserves and Robertson notes that only one sort of currency had a 100% reserve requirement, so I don’t know why you think it’s such a big deal.


  8. 8 Blue Aurora January 2, 2015 at 9:14 pm

    While this comment is belated…didn’t Lord J.M. Keynes acknowledge Sir Dennis H. Robertson and Sir Ralph G. Hawtrey as being “ahead” of him in some respects in understanding some matters of the economy?


  9. 9 David Glasner January 4, 2015 at 7:45 am

    Blue Aurora, Yes Keynes, I believe in his 1937 paper on Alternative Theories of the rate of interest, referred to Hawtrey as his grandparent, and Robertson as his parent, in the paths of errancy.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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