The Origins of the Classical Gold Standard : A Revisionist History

This paper situates the early history of the Bank of England in the 17th century environment where the circulation of specie-based coin caused it to wear down, prompting debasement by monetary authorities (Lane and Mueller 1985). Thus, the 19th Gold Standard was only possible because of prior institutional changes that made a fixed specie standard practicable: these changes included the 1696 recoinage that committed Britain to a fixed specie standard, the 1694 founding of the Bank of England that reduced the need for coin by substituting Bank notes as high powered money, and the reformation of the payments system that reduced the need for coin in local markets. In order to understand the value of introducing a bank-based money supply into a coin-based economy, this paper uses a liquidity frictions model to frame the discussion and to explore the important role played by the Bank of England in the British monetary system from the Bank's earliest decades