## GOLD, SILVER, AND MONETARY STABILITY

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**Canonical URL:** [GOLD, SILVER, AND MONETARY STABILITY](https://www.imf.org/-/media/files/publications/fandd/article/2023/march/wiegand.pdf)

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### 1873 as a monetary turning point
- Key events in 1873:
  - July: the new German Empire Reichstag replaced an array of silver-based currencies with the gold mark.
  - September: the Paris mint limited silver coinage, ending France’s double gold-silver monetary standard.
  - Earlier in 1873: US Congress legislated phasing out temporary Civil War paper currency to replace it with a gold dollar once the government resumed specie payments (which happened in 1879).
- By the end of the 1870s all the world’s leading industrial nations used gold currencies; silver became a secondary currency metal used mostly by periphery countries.
- Monetary and economic impacts:
  - Between 1873 and the end of the decade, silver depreciated by some 20 percent relative to gold.
  - Gold countries experienced severe deflation that lasted until the early 1890s.
  - Industrial production and other indicators point to a severe and long recession in several countries (example: Germany’s post-1873 years known as the Gründerkrise).

### Global bimetallism: mechanism and challenges
- Structure and functioning:
  - Early 19th century: most countries tied currencies to silver; the UK and, beginning in the mid-1830s, the US were on gold.
  - France’s Napoleonic law (1803) fixed mint prices: 200 francs per kilo of silver and 3,100 francs per kilo of gold.
  - France’s double price guarantee ensured a stable exchange value of 15½ between silver and gold and quasi-fixed exchange rates between gold and silver currency countries.
  - France functioned as a global monetary stabilizer: under Gresham’s law, changes in global quantities of gold and silver translated primarily into changes in France’s currency composition while exchange rates between metals remained stable.
  - Bimetallism better stabilized prices than a single-metal regime because supply shocks to gold and silver partially offset one another.
- Disruption beginning c. 1850:
  - Large gold discoveries in California and Australia increased global gold production by a factor of 5.
  - Per Gresham’s law, the share of gold in French specie surged—from less than 30 percent around 1850 to more than 85 (!) percent in the mid-1860s.
  - Risk: if gold crowded out silver entirely from French specie, France would become de facto gold country and the global bimetallic bond would break, splitting the world into gold and silver blocs and triggering volatile exchange rates and prices.

### Bimetallism in the 1860s and international tensions
- 1867 Paris international monetary conference issued a nonbinding recommendation for a global currency system based on gold.
- France’s dilemma:
  - Moving to gold required shedding silver coins, but demonetizing silver would devalue France’s silver holdings—imposing a loss on France.
- Germany’s dilemma:
  - Most German states used silver currencies. Without the bimetallic bond, Germany would face floating exchange rates with gold countries and risk economic demotion to a periphery economy.
  - German reform required someone (effectively France) to absorb their silver under the bimetallic system, creating strategic uncertainty and stalling reform beyond preliminary steps in the 1860s.
- Conclusion for the 1860s: bimetallism survived because France both controlled and was hostage to the system; markets treated gold- and silver-based assets as near-perfect substitutes.

### Germany’s reform in 1870–1873
- Context:
  - 1870: Prussia-led German victory in the Franco-Prussian war; France obliged to pay a large indemnity (more than 20 percent of French GDP), payable in silver among other things.
  - France’s need to pay the indemnity constrained its ability to abandon bimetallism immediately.
- German actions:
  - July 1871: Berlin mint suspended silver coinage.
  - Shortly thereafter: federal government began buying gold in London.
  - Early December 1871: Reichstag passed law authorizing gold coinage.
  - New gold coins were introduced by spending the indemnity rather than first withdrawing silver coins, producing a large (and short-lived) fiscal-monetary stimulus.
  - July 1873: the Reichstag formally adopted the gold standard.
- Rationale for Germany choosing gold (not bimetallism):
  - Germany’s specie circulation was too small to sustain global bimetallism on its own; it needed France to maintain the bimetallic bond.
  - After armed conflict, cooperation with France seemed unlikely, so moving all the way to gold avoided monetary isolation regardless of France’s decisions.
  - Several other countries (Scandinavian countries and the Netherlands) also switched from silver to gold in this window.

### Breaking bimetallism and France’s choice
- September 5, 1873: France settled the indemnity’s last installment via two bond issuances (the Rente Thiers) of previously unknown volume; the next day the Paris mint limited silver coinage, effectively breaking the bimetallic bond.
- Interpretations of France’s move:
  - Flandreau (1996) suspected revanchism as motive; ending bimetallism harmed France but harmed Germany even more due to Germany’s larger silver holdings.
  - Velde (2002) interpretation: beginning in the early 1870s, renewed American West discoveries boosted global silver production; facing the prospect of being swamped with silver inflows (and the risk of later monetary isolation on silver), France chose to limit silver early while its silver holdings were still small and Germany’s large.
- France’s gradual demonetization:
  - Initially the Treasury framed limits on silver coinage as temporary and contingent on excessive silver inflows stopping—an implicit invitation to Germany to reconsider.
  - When cooperation failed, markets concluded bimetallism was gone in early 1875; in 1876 France suspended silver coinage entirely and the classic gold standard emerged.

### Aftermath and longer-term effects
- Early gold standard years were rough:
  - Persistent deflation in the new gold bloc drove up real interest rates and weighed on profits and investment.
  - Distributional conflicts between debtors and creditors intensified and politicized monetary policy.
  - Bimetallic lobby groups formed and international conferences in 1878, 1881, and 1892 failed to restore bimetallism.
- 1886 gold boom:
  - July 1886: discovery in South Africa’s Witwatersrand revealed an enormous gold deposit, producing a gold boom that dwarfed earlier Australia and California discoveries.
  - The gold inflow increased money supply, allowed rapid reflation of liquidity-strapped economies, ended deflation, and eased debt concerns.
- The belle époque:
  - Period of rapid economic, technological, and cultural development lasting until World War I; prosperity enhanced the gold standard’s reputation.
  - After World War I, policymakers sought to restore the gold standard—later characterized as tying the “golden fetters” that amplified the Great Depression.

### Lessons and policy implications
- Historical findings:
  - Bimetallism operated smoothly when only one country (France) needed to sustain it and the broader financial environment was stable.
  - Maintaining bimetallism in the face of shocks would have required international cooperation; cooperation failed.
- Policy implications:
  - Monetary stability is a global public good and requires international cooperation.
  - The basic feature that global public goods require cooperation applies across domains—from monetary stability to securing peace and safeguarding the climate.

*Johannes Wiegand, Finance & Development, March 2023.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/march/wiegand.pdf_