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.
We propose a toolkit for the assessment of systemic risk buildup in low income countries. We show that, due to non-linearity in the relationship between credit and financial stability, the assessment should be conducted with different tools at different stages of financial development. In particular, when the level of financial depth is low, traditional leading indicators of banking crises have poor predictive performance and the analysis should be based on indicators that account for financial deepening while taking into consideration countries’ structural limits. By using this framework, we provide a preliminary assessment of systemic risk buildup in individual SSA countries.
We propose a toolkit for the assessment of systemic risk buildup in low income countries. We show that, due to
non-linearity in the relationship between credit and financial stability, the assessment should be conducted with
different tools at different stages of financial development. In particular, when the level of financial depth is low,
traditional leading indicators of banking crises have poor predictive performance and the analysis should be based
on indicators that account for financial deepening while taking into consideration countries’ structural limits. By
using this framework, we provide a preliminary assessment of systemic risk buildup in individual SSA countries.
The 1865 Handelstag
The 1868 Handelstag
V. Main Conclusions
1. Estimating Specie Demand
2. Gold Share and Bimetallism’s StructuralLimits
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
, bimetallism’s upper structurallimit—i.e., gold becomes so abundant that it crowds out silver entirely from France’s specie circulation—bimetallism’s viability is in doubt.
Figure 2: Prospects for Bimetallism, 1866–75
(Global gold stock in percent of total bullion (gold & silver), evaluated at the pre-1873 French legal mint ratio)
Sources: Hay (1887) , Flandreau (1995) , and author’s calculations
Figure 2 highlights the concerns harbored by Soetbeer and his contemporaries. Assessed from the perspective of the late-1860s, both the static and the dynamic
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.
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 structurallimits, which form the boundary condition (2). 7 The key result is that the structurallimits bracket the global gold share throughout the estimation period, hence
different levels of financial development. When the level of financial development is low, the most-used leading indicator of banking crisis (namely, the credit-to-GDP gap) is a poor predictor of performance, as it is unable to distinguish episodes of financial deepening from bubble-like credit booms. In contrast, indicators that take into consideration countries’ structurallimits have a good capacity to correctly predict financial crises.
4 Favorable interest rate conditions, taxation, and regulations for government bonds offer an advantage compared with private
Mr. Nicolas Arregui, Mr. Mohamed Norat, Antonio Pancorbo, Ms. Jodi G Scarlata, Eija Holttinen, Fabiana Melo, Jay Surti, Christopher Wilson, Rodolfo Wehrhahn, and Mamoru Yanase
This paper reviews tools used to identify and measure interconnectedness and raises the awareness of policymakers as to potential cross-sectional implications of prudential tools aimed at controlling interconnectedness. The paper examines two sets of tools—developed at the IMF and externally—to identify the implications of interconnectedness in systemic risk and how these tools have been applied in IMF surveillance. The paper then proposes a preliminary framework to analyze some key internationally-agreed-upon and national prudential tools and finds that while many prudential tools are effective in reducing interconnectedness, the interaction among these tools is far less clear cut.