Bimetallism's Last Stand: How Political and Historical Factors Shifted the Balance to Gold
The conventional view that the gold standard emerged out of the contradictions of bimetallism is not persuasive. Instead, this article claims that bimetallism might have survived and provides an alternative explanation for the gold standard's emergence.
“The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870-1880” (MARC FLANDREAU)
This article presents a fresh perspective on the bimetallic standard before 1873 and its transition to the monometallic gold standard between 1870 and 1880. The traditional belief that the gold standard emerged due to conflicts within bimetallism is not convincing. The article suggests that bimetallism could have continued to exist and presents an alternative explanation for the gold standard's rise. This emergence was influenced significantly by political and historical factors and occurred in an uncoordinated manner across the international arena.
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Marc Flandreau
Summary Generated with OpenAI
The 1870s was a decade of dramatic changes in the organization of the international monetary system, with most industrialized nations transitioning from a silver standard to a gold standard. Traditional theories of this shift have emphasized the importance of rising silver production, Germany's demonetization of silver, silver being bulkier than gold for international payments, and the political support of the creditors' class. However, these theories are incomplete and flawed. It is more accurate to view the gold standard transition as an accident of history caused by the combination of network externalities and switching costs.
Before 1870, the gold-silver exchange rate remained stable despite being based on two commodities that should have fluctuated in price. This was achieved through the active policy of monetary institutions, such as central banks, who would buy the excess of one metal against the other. The fundamentals theory suggests that the rise in silver production after discoveries of new outlets in Nevada and Mexico, in combination with improvements in silver production, was a serious blow for bimetallism and would have forced France to end bimetallism by limiting silver coinage in 1873. However, a model developed to test the fundamentals theory has been used to show that bimetallism could have been sustained, as France would have been able to buffer the rising silver production, and the proportion of gold in its circulation would have remained dominant.
The consequence of Germany’s 1871 decision to unify its currency and switch to gold had far-reaching economic effects. The indemnity of five billion francs imposed on France impacted the international bullion markets, but the French circulation was strong enough to accommodate the shock. Ultimately, it was the French decision to limit the coinage of silver that caused the price of silver to fall, not the other way around. The transaction costs approach, developed by Angela Redish, to the emergence of the gold standard states that silver only fit smaller transactions for which it dominated token monies, silver had an intrinsic value equal to its nominal price, and the adoption of the steam press in Britain caused an earlier introduction of the gold standard there. However, it is flawed because France should have moved to gold earlier than it did and the endogeneity of the supply of smaller silver currency was not an inescapable consequence of the operation of bimetallism.
Giulio Gallarotti argues that the events of the 1870s should be related to the growing progold agitation of the 1850s and 1860s when urban-capitalist interests (businessmen, bankers, creditors, etc.) were opposed to inflationary agrarian interests (farmers and landowners). However, it was not until 1876 that the connection between bimetallism and easy-money interests was established due to a decline in world prices. Ultimately, the new ingredient of the 1870s that pushed the emergence of the gold standard was the progold agitation of the earlier decades.
The emergence of the international gold standard in the 1870s was a result of network externalities and economic interests that favored a world currency. The strategic externalities of favoring one’s main trading partner's currency and the desire to reduce transaction costs created an increasing trend toward adopting one single currency. While these externalities were not liable to produce any specific system, the 1860s favored gold due to the large proportion of gold circulation in France, Belgium, Switzerland, and Italy. The War of 1871 between Germany and France had severe financial repercussions. With Germany demanding a hefty indemnity, France was forced to purchase gold to meet the payments, thus destabilizing the bimetallic system of the two nations. In response, France limited the coinage of silver, and Germany attempted to dispose of its silver holdings. This resulted in a stalemate, as neither nation was able to commit to a gold standard fully. The smaller nations such as Denmark, Norway, and Sweden rapidly sold their silver holdings on world markets, and Europe eventually switched to a gold standard.
In conclusion, the emergence of the international gold standard in the 1870s was an accident of history caused by the combination of network externalities and switching costs, which incentivized a common standard. The War of 1871 and the indemnity imposed on France destabilized the bimetallic system and caused a world-wide flight away from silver. While the traditional theories of this shift emphasize the importance of rising silver production, Germany's demonetization of silver, and silver being bulkier than gold for international payments, they are incomplete and flawed. The new ingredient of the 1870s that pushed the emergence of the gold standard was the progold agitation of the earlier decades, combined with the strategic externalities and economic interests of a world currency.
Who is Marc Flandreau?
Marc Flandreau is a Howard S. Marks Professor of Economic History at the History Department of the University of Pennsylvania, with a secondary appointment at the Wharton School's Legal Studies & Business Ethics Department. He is a leading historian and economist who studies the international monetary system and the financial entanglements of international institutions from the mid-19th century to World War I. He previously worked as a professor at the Graduate Institute for International Studies and Development in Geneva. He has published three books: Anthropologists in the Stock Exchange: A Financial History of Victorian Science; The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard; and Money Doctors: The Experience of International Financial Advising, 1850-2000. He is a graduate of Ecole Normale Supérieure and the Sorbonne and also obtained his Ph.D. as part of the European Program in Quantitative Economics, awarded by the London School of Economics. He is a Research Fellow of CEPR, London, and a member of the Policy Panel of the Bank of International Settlements in Basel.
