A New World Order: Explaining the Emergence of the Classical Gold Standard

Abstract

The classical gold standard only gradually became an international monetary regime after 1870. This paper provides a cross-country analysis of why countries adopted when they did. I use duration analysis to show that network externalities operating through trade channels help explain the pattern of diffusion of the gold standard. Countries adopted the gold standard sooner when they had a large share of trade with other gold countries relative to GDP. The quality of the financial system also played a role. Support is found for the idea that a weak gold backing for paper currency emissions, possibly because of an unsustainable fiscal position or an un-sound banking system, delayed adoption. A large public debt burden also led to a later transition. Data are also consistent with the idea that nations adopted the gold standard earlier to lower the costs of borrowing on international capital markets. I find no evidence that the level of exchange rate volatility or agricultural interests mattered for the timing of adoption.