Was the Emergence of the International Gold Standard Expected?
Melodramatic Evidence from Indian Government Securities
Graduate Institute, Geneva
Université Libre de Bruxelles
"The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard..."
The emergence of the gold standard has long been viewed as inevitable. Fluctuations of the gold silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. As a result, as long as France did enforce the bimetallic option, the gold-silver exchange rate remained remarkably stable. It has been found that France had the resources and institutional capacity to buffer bullion supply shocks. It had successfully weathered the California Gold Rush and after 1865, it could withstand rising silver production from Nevada and even Germany’s decision to adopt the gold standard. It was only when France forfeited the bimetallic option, in late 1873, and for political reasons, that bimetallism came under stress. The emergence of the Gold Standard, as Flandreau (2004, p. 212) has argued, was an accident of history...."
[Mrt: so what are the tea leaves telling us today?]
[MrtII: looking deeper - this should be rechecked if this syncs with freegold.]