”, where the bad money with a lower commodity value, vis-à-vis silver, would drive out the one with the higher commodity value, vis-à-vis gold.
In the last quarter of the nineteenth century, the shortcomings of the prevailing bimetallic system had divided the Western countries among themselves. This took place especially between those who were operating solely on silver as the only medium of exchange and those who were solely operating on gold as well as those operating on bimetallic standards; on both gold and silver. This situation was causing many of the industrializing European economies to experience growing difficulties in international transactions as well problems in creating a smoothly functioning domestic economy.
As Britain and the United States, two countries that were fully committed to gold, emerged as the world’s most prominent financial and industrial powers with the advent of the industrial revolution by the end of the century, some of the few countries with silver standards have decided to peg their silver coins to the gold standards of those countries. “By the beginning of the twentieth century, there had finally emerged a truly international system based on gold.” (Eichengreen, 2008, pg. 19)
This system was called the “Classical Gold Standard System.”
The Classical Gold Standard System (1880-1914)
“The breakdown of the international gold standard was the link between the disintegration of world economy since the turn of the century and the transformation of a whole civilization in the thirties.” (Polanyi, The Great Transformation, pg. 20)
Historically, the most famous and durable international monetary system was the Gold Standard System largely because several things have served as a medium of exchange in the early days of the nineteenth century. For instance, some of those things were cattle, sheep, wine, jewelry, and diamonds as well as many other precious stones that were being bought and sold in the markets. However, metal coins had some unique characteristics to be more acceptable; (I) First of all, metal coins were easy to divide (divisibility), (II) Secondly, coins were also very durable (durability), (III) Thirdly, the supply of precious metals such as gold and silver were stable to a great extent, and their final and their most important feature which served in the facilitation of daily transactions (IV) was their recognizability. It is primarily for these reasons that metal coins became the most popular medium of exchange over time driving out others.