In the early 1870s, the global monetary system transitioned from bimetallism—a regime in which gold and silver currencies were tied at quasi-fixed exhange ratios—to the gold standard that was characterized by the use of (only) gold as the main currency metal by the largest and most advanced economies. The transition ocurred against the backdrop of both large supply shifts in global bullion markets in the 1850s and 60s and momentous political events, such as the Franco-Prussian war of 1870/71 and the subsequent foundation of the German empire. The causes for the transition have long been a matter of intense debate. This article discusses three separate but interrelated issues: (i) assessing the robustness of the pre-1870 bimetallic system to shocks—which includes a discussion of the appropriate use of Flandreau’s (1996) reference model; (ii) analyzing the transition from bimetallism to gold as a multi-stage currency game played by France and Germany; and (iii) evaluating the monetary debates at the German Handelstag conferences in the 1860s, to present a more complete narrative of the German discussion in the run-up to the transition.
Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard. The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected. Even after radical institutional change, history still shapes the decisions of policymakers.
International Monetary Fund. External Relations Dept.
to increase, and indeed even fell off, in the years 1964 and 1965 while simultaneously the Bundesbank’s gold holdings were built up out of these multilateral operations, there was an increase in the goldshare in overall reserves. Measured in relation to the Bundesbank’s gross monetary reserves the goldshare rose from 50.3 per cent at the end of 1963 to 60.3 per cent at the end of 1965. Foreign comments on this increase in the goldshare have occasionally described it as being a basic change in the Bundesbank’s reserve policy. In so doing the fact has been
The 1865 Handelstag
The 1868 Handelstag
V. Main Conclusions
1. Estimating Specie Demand
2. GoldShare and Bimetallism’s Structural Limits
3. Actual and Predicted Specie Holdings in France, 1850–70
4. Specie Demand: Meissner’s Approach
5. Assessing Bimetallism’s Robustness with Meissner’s Approach
6. Bimetallism’s Robustness to Currency Reforms
7. Share of Silver Coins in France’s Specie Circulation, 1849–73
8. Currency Regime Preferences at the 1868 Handelstag
illustrates what happens in practice when evaluating the boundary condition (2) while ignoring Flandreau’s procedure. It shows two sets of estimates:
The black lines reproduce Flandreau’s estimates. Specie demand parameters are obtained from regressing specie circulation in the bimetallic block on cumulative global bullion production as in (3); the parameters are then used to compute bimetallism’s structural limits, which form the boundary condition (2). 7 The key result is that the structural limits bracket the global goldshare throughout the estimation period, hence
( Table 4 , column 5). In contrast, we find a strong, significant and robust coefficient on currency/GDP when the share of gold in total foreign reserves ( goldshare ) is used as the dependent variable ( Table 4 , columns 3–4, 6). In the pooled panel, the interaction term of gold standard exposure*currency is negative for non-gold reserves (column 2) and positive for the goldshare (column 4). Overall, those results confirm that monetary authorities treated gold and foreign exchange reserves differently, and that the allocation between the two forms of reserves was
International Monetary Fund. External Relations Dept.
This paper focuses on the economic development in Taiwan. The paper highlights that it was under the Japanese that the first significant commercial development took place in Taiwan as the colony was transformed into a supplier of foodstuffs, particularly rice and sugar, for sale in Japan, in accordance with the normal views of that time of the role of a colonial dependency. The Japanese established an infrastructure in the form of power, communications, and water control systems. The last was an important contribution.
/early 1850s gold shock is excluded from the information set: it is treated a one-off event that is not expected to repeat. The scenario is designed to be favorable for bimetallism, as it both extrapolates the trend decline in gold production after 1853 and already captures the harbingers of the 1870s silver bonanza (see Annex).
b. In the second step, the monetary implications of these projections are assessed within Flandreau’s (1996) model of the global bimetallic system. 10 Whenever the projected global goldshare is on a trajectory that breaks, or comes close to
In 1871-73, newly unified Germany adopted the gold standard, replacing the silver-based currencies that had been prevalent in most German states until then. The reform sparked a series of steps in other countries that ultimately ended global bimetallism, i.e., a near-universal fixed exchange rate system in which (mostly) France stabilized the exchange value between gold and silver currencies. As a result, silver currencies depreciated sharply, and severe deflation ensued in the gold block. Why did Germany switch to gold and set the train of destructive events in motion? Both a review of the contemporaneous debate and statistical evidence suggest that it acted preemptively: the Australian and Californian gold discoveries of around 1850 had greatly increased the global supply of gold. By the mid-1860s, gold threatened to crowd out silver money in France, which would have severed the link between gold and silver currencies. Without reform, Germany would thus have risked exclusion from the fixed exchange rate system that tied together the major industrial economies. Reform required French accommodation, however. Victory in the Franco-Prussian war of 1870/71 allowed Germany to force accommodation, but only until France settled the war indemnity and regained sovereignty in late 1873. In this situation, switching to gold was superior to adopting bimetallism, as it prevented France from derailing Germany’s reform ex-post.
effect on market sentiment of central bank gold sales should not be underestimated, but such sales as have occurred have been modest in comparison with the level of total central bank holdings, and the proportional decline is almost entirely due to the rise in foreign currency reserves.
Figure 10.5 .
GoldShare of Central Bank Reserves
Source: IMF, International Financial Statistics .
Significant Changes in Objectives and Investment Policies
The significant developments over recent years in central bank reserves management have been