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.
The 1865 Handelstag
The 1868 Handelstag
V. Main Conclusions
1. Estimating Specie Demand
2. Gold Share 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. ShareofSilverCoins in France’s Specie Circulation, 1849–73
8. Currency Regime Preferences at the 1868 Handelstag
Bimetallism’s Robustness to Currency Reforms
ShareofSilverCoins in France’s Specie Circulation, 1849–73
Source: Flandreau (1995)
So, How Robust Was Bimetallism?
The question that remains is how vulnerable bimetallism was to the currency reforms of the 1870s. As rightly noted in Meissner (2015) , not only Germany replaced silver with gold coins in this decade, but also the Netherlands and the Scandinavian countries (Denmark Norway, Sweden and Finland), and the United States replaced the paper (’greenback’) dollars from
This paper formalizes Irving Fisher’s century-old model of bimetallism and adds the important “disequilibrium” dynamics to deal with the long periods during which bimetallic countries were on effective monometallic standards. It resolves a long standing puzzle in the bimetallic literature regarding the remarkable stability of the gold/silver price ratio in the nineteenth century by modeling the bimetallic mint ratio as a regulating barrier to the gold/silver price ratio. It thus provides a clean-cut example of a target-zone model that—in contrast to other such models in the literature—exhibits the main predicted nonlinearities in the data. This is a Paper on Policy Analysis and Assessment and the author(s) would welcome any comments on the present text. Citations should refer to a Paper on Policy Analysis and Assessment of the International Monetary Fund, mentioning the author(s) and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
jumps from zero to a positive value. Therefore, y s = ln(Y SS + (1 - λ 1 )Y BIM1 ) jumps up and y G = In(Y GS + (1 - λ 1 )Y BIM1 ) jumps down, instantaneously decreasing w to leave the market ratio x unchanged. Note that y S and y G jump even though the actual levels of output in the gold and silver areas, Y GS and Y SS remain unchanged. The jump in w is a result of the jump in λ 1 , the shareofsilvercoins in the bimetallic money supply. We can think of this as a rush to mint silver at the bimetallic mint that instantaneously converts a share λ 1 of