The Gold Standard

By the 1700's, fiduciary money circulated widely in Western Europe, along with metallic coins. One of the most important banks of issue was the Bank of England, originally a private business. In the Napoleonic Wars, however, Britain had to resort to desperate measures to carry on the war. The Bank of England was nationalized and a system of paper "fiat money" was adopted.

After the war, Britain wanted to reconstruct a monetary system more like the prewar one, but a lot had changed. The government brought in a consultant -- gentleman-economist David Ricardo. Ricardo designed a new, somewhat more streamlined monetary system.

In the new monetary system, paper Pound notes were the main medium of exchange. The Bank of England would hold a certain amount of gold for very Pound note in circulation. However, individual Pound notes could not be redeemed for gold coin. Pound notes would be convertible to gold only in large amounts, mainly for international trade. The notes would not be convertible to coin, but to bullion.

This is the "classical" gold standard of the nineteenth century -- strictly speaking, not a gold coin system but a paper money system with the paper (fiduciary) money exchangeable for gold bullion.

Now let's see what the American Republic had in the way of a monetary system.

The Fed