Handbook of Exchange Rates

5.2 A Brief History of Currency Regimes

Currency regimes, until recently, have relied on a link to a valuable commodity, usually gold or silver, to establish the value of a currency. While the monetary use of precious metals can be traced back to 2900 BC, this took the form of ingots whose value was based on weight (Eagleton and Williams, 2007, p. 16). Coinage seems to have emerged around 700–800 BC, when Lydian coins made of electrum (a naturally occurring mixture of gold and silver) were struck (Eagleton and Williams, 2007, p. 24). International exchange of currencies was normally based on their bullion value, whatever their value in tale (that is, their nominal value as officially declared). Exchange rates between currencies were thus relatively straightforward and stable—as long as countries linked their currency to the same precious metal and the currency was not “debased.” However, the classical gold standard period—when all the major powers linked their domestic currency's value to gold—lasted only from 1896 to 1914.

England was effectively on the gold standard starting in 1817, with silver coins becoming subsidiary currency whose value was established by fiat, not by their (lesser) bullion value (Chown, Chapter 7). However, during much of the nineteenth century, other European countries, the United States, Japan, and India variously had a silver standard or a bimetallic standard whereby both gold and silver coins were supposed to reflect their metallic content. However, ...