In a recent post, I noted that in modern history -- in a long durée sense -- there have been essentially three monetary standards. Repeating myself, a silver standard, dominated by the Spanish silver peso (which anchored global trade and is shown above),* and was mostly managed by Italian (Genoese) and then Dutch bankers (Bank of Amsterdam), a gold standard, dominated by British pound (that anchored the Industrial Revolution, 1st and 2nd), and was managed by the Bank of England, and a fiat standard, dominated by the dollar, and managed by the Federal Reserve and the multilateral organizations (IMF, World Bank, BIS, etc.). The transition to the gold standard was associated with the demonetization of silver (The Wizard of Oz effect, one might call it), and the rise of the dollar was associated to the demonetization of gold. I discussed both things in my paper (not paywalled paper) on the end of Bretton Woods a few years back.
However, I did not discuss why metal standards were so durable or why they were adopted in the first place. This is often interpreted in the mainstream literature as evidence of the correctness of the metallist interpretation of money origins, which does not have any basis on the archeological evidence of the development of money, I might add. Before I get to that, it is worth exploring why in the modern era, after the rise of modern nation states, silver, and gold remained the dominant standards for so long.
Metallic standards survived for a long time, but their historical function changed once a dominant state was able to impose its own liabilities as the international means of payment, reserve asset, and unit of account (this one is the central function, BTW). The rise of the pound did not simply mean that gold replaced silver because gold was technically superior. Rather, Britain’s industrial, financial, naval, and imperial power allowed the pound to become the true organizing currency of the system. Gold remained the formal standard, but the underlying system was increasingly a pound standard, as noted by Marcello de Cecco long ago. In that context, the demonetization of silver was part of the consolidation of British monetary hegemony. Silver, historically the dominant monetary metal, was displaced as the key international monetary anchor when the pound became the central currency of world trade and finance. As noted, the demonetization of silver took place with the rise of the pound as hegemonic currency and the late nineteenth-century establishment of the gold standard.
The same logic applies to gold and the dollar. Bretton Woods was formally a gold-dollar system, but in practice it was already predominantly a dollar system. The reality of a dollar-based order was already evident by the Second World War. Just as the pound had been the de facto key currency before World War I, the dollar had become, for all practical purposes, the key currency by the war. The closing of the gold window in 1971 therefore did not create dollar hegemony from scratch. It removed the residual metallic constraint on a system already organized around the dollar.
The deeper explanation is state power and hierarchy, not metallism. Agents accepted pounds and later dollars not because these currencies were attached to gold or silver, but because Britain and then the United States had the military, financial, commercial, and institutional power to make their currencies the international unit of account and reserve asset. The willingness to use pounds and later dollars for trade, contracts, reserves, and calculations about the future was not due to their connection to gold, but to “raw military power” and the capacity to enforce rules globally (as I said in the paper linked above).
That also means that the demonetization of metals marks the transition from metal-mediated hegemony to increasingly explicit state-money hegemony. Silver was demonetized as pound hegemony became consolidated through the gold standard. Gold was demonetized as dollar hegemony became consolidated through the flexible dollar standard. In both cases, the metal was less the foundation of the system than a transitional institutional device through which a rising hegemon’s currency acquired and stabilized the international monetary system.
The contrast with a metallist view is important. A metallist account would say that silver and later gold lost because of their inadequacy as monetary anchors, changes in their relative scarcity, and so on. Instead that metals were demonetized when they became unnecessary, or worse restrictive, for the dominant state’s currency. The decisive factor was not the intrinsic property of the metal, but the ability of Britain and later the United States to make the world accept their state-backed monetary liabilities.
Of course this argument can be made compatible with the conventional metallist story, but only if the metallist argument is demoted from a theory of money’s essence to a theory of the historical conditions under which early monetary power could be exercised. The conventional metallist view says precious metals became money because they had useful physical properties, namely: durability, divisibility, portability, relative scarcity, and high value-to-weight ratios. One does not need to deny that. In fact, those characteristics help explain why, in early long-distance trade and pre-modern fiscal systems, metallic money was a practical instrument. Where states had limited administrative capacity, limited policing power, weak or nonexistent banking systems, and no modern anti-counterfeiting technology, precious metals made monetary claims more secure. It was in the state's interest to use the metals as monetary standards.
But those physical properties do not explain why a monetary standard becomes hegemonic. They explain why metals were useful vehicles of money, not why money has value or why one monetary system dominates another. The widespread view among monetarist bros that money needs to have some intrinsic value is nonsensical. The deeper issue is power. The capacity to define the unit of account, enforce contracts, tax, borrow, command resources, and control trade routes.
In other words, metals mattered because early states and merchant powers lacked the institutional and technical capacity to impose pure state fiat money across large geographical spaces. Precious metals were a solution to the limits of enforcement. They allowed payment and settlement beyond the immediate reach of political authority. In that sense, metallism captures something real about the constraints of early monetary systems. But once state capacity expanded and paper currency (Chinese invention), public debt and central banking were invented (both Western inventions), military reach and productive capacity were expanded, and anti-counterfeiting technology was developed, the metal standards became less foundational and more of a historical shell around state-fiat money.
That fits better what we know about money origins. Money does not originate naturally from barter or from the intrinsic scarcity of precious metals. Scarcity alone cannot explain international monetary hierarchy. Silver did not dominate merely because of its physical characteristics, nor did gold replace silver simply because it was technically superior. And the dollar did not replace gold because fiat money was naturally more efficient. These shifts reflected the rise of successive hegemonic powers. First the mercantile and imperial trading powers, then Britain, then the United States dominated the global economy. This requires a chartalist/classical-political-economy point of view to be fully understood. Metallic standards do not imply that money is not based on state power. Historically, it was often the form through which state (read military/coercive) and mercantile power could be projected before the institutional conditions for a global fiat standard existed.
* As I often tell kids in class, in many Romance languages the word for money itself is silver.
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