Editing Gold standard (section)

===Central banks and the gold exchange standard===
[[File:1879S Morgan Dollar NGC MS67plus Obverse.png|thumb|right|The US dollar was said to be on a limping standard due to huge quantities of silver [[Morgan dollar]]s continuing to circulate at par with [[gold dollar]]s despite their silver value being less.]]
As feared by the various international monetary conferences, the switch to gold, combined with record U.S. silver output from the [[Comstock Lode]], plunged the price of silver after 1873 with the gold–silver ratio climbing to historic highs of 18 by 1880. Most of continental Europe made the conscious decision to move to the gold standard while leaving the mass of legacy (and erstwhile depreciated) silver coins remaining unlimited legal tender and convertible at face value for new gold currency. The term '''limping standard''' was used to describe currencies whose nations' commitment to the gold standard was put into doubt by the huge mass of silver coins still tendered for payment, the most numerous of which were [[French franc|French 5-franc coins]], [[Vereinsthaler|German 3-mark Vereinsthalers]], [[Dutch guilder]]s and American [[Morgan dollar]]s.<ref name="limping">{{Cite journal |last=Conant |first=Charles A. |date=1903 |title=The Future of the Limping Standard |journal=Political Science Quarterly |volume=18 |issue=2 |pages=216–237 |doi=10.2307/2140681 |jstor=2140681 |issn=0032-3195}}</ref>

Britain's original gold specie standard with gold in circulation was not feasible anymore with the rest of Continental Europe also switching to gold. The problem of scarce gold and legacy silver coins was only resolved by national [[central bank]]s taking over the replacement of silver with national bank notes and token coins, centralizing the nation's supply of scarce gold, providing for reserve assets to guarantee convertibility of legacy silver coins, and allowing the conversion of banknotes into gold bullion or other gold-standard currencies solely for external purchases. This system is known as either a '''gold bullion standard''' whenever gold bars are offered, or a '''gold exchange standard''' whenever other gold-convertible currencies are offered.

[[John Maynard Keynes]] referred to both standards above as simply the gold exchange standard in his 1913 book ''Indian Currency and Finance''. He described this as the predominant form of the international gold standard before the First World War, that a gold standard was generally impossible to implement before the 19th century due to the absence of recently developed tools (like central banking institutions, banknotes, and token currencies), and that a gold exchange standard was even superior to Britain's gold specie standard with gold in circulation. As discussed by Keynes:<ref name="Keynes gold" />

{{blockquote|The Gold-Exchange Standard arises out of the discovery that, so long as gold is available for payments of international indebtedness at an approximately constant rate in terms of the national currency, it is a matter of comparative indifference whether it actually forms the national currency&nbsp;... The Gold-Exchange Standard may be said to exist when gold does not circulate in a country to an appreciable extent, when the local currency is not necessarily redeemable in gold, but when the Government or Central Bank makes arrangements for the provision of foreign remittances in gold at a fixed maximum rate in terms of the local currency, the reserves necessary to provide these remittances being kept to a considerable extent abroad.

Its theoretical advantages were first set forth by Ricardo (i.e. [[David Ricardo]], 1824) at the time of the Bullionist Controversy. He laid it down that a currency is in its most perfect state when it consists of a cheap material, but having an equal value with the gold it professes to represent; and he suggested that convertibility for the purposes of the foreign exchanges should be ensured by the tendering on demand of gold bars (not coin) in exchange for notes, so that gold might be available for purposes of export only, and would be prevented from entering into the internal circulation of the country.

The first crude attempt in recent times at establishing a standard of this type was made by Holland. The free coinage of silver was suspended in 1877. But the currency continued to consist mainly of silver and paper. It has been maintained since that date at a constant value in terms of gold by the Bank's regularly providing gold when it is required for export and by its using its authority at the same time for restricting so far as possible the use of gold at home. To make this policy possible, the Bank of Holland has kept a reserve, of a moderate and economical amount, partly in gold, partly in foreign bills.

Since the Indian system (gold exchange standard implemented in 1893) has been perfected and its provisions generally known, it has been widely imitated both in Asia and elsewhere&nbsp;... Something similar has existed in Java under Dutch influences for many years&nbsp;... The Gold-Exchange Standard is the only possible means of bringing China onto a gold basis&nbsp;...}}

The classical gold standard of the late 19th century was therefore not merely a superficial switch from circulating silver to circulating gold. The bulk of silver currency was actually replaced by banknotes and token currency whose gold value was guaranteed by gold bullion and other reserve assets held inside central banks. In turn, the gold exchange standard was just one step away from modern [[fiat currency]] with banknotes issued by central banks, and whose value is secured by the bank's reserve assets, but whose exchange value is determined by the central bank's [[monetary policy]] objectives on its purchasing power in lieu of a fixed equivalence to gold.