## Gold, Silver, and Monetary Stability

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**Canonical URL:** [Gold, Silver, and Monetary Stability](https://www.imf.org/en/publications/fandd/issues/2023/03/gold-silver-monetary-stability-johannes-wiegand)

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## Bibliographic details
- Authors: Johannes Wiegand
- Published: March 1, 2023

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### Overview and turning point (1873)
- The year 1873 marked a turning point in monetary history: 
  - In July, the Reichstag of the newly established German Empire replaced an array of silver-based currencies with the gold mark.
  - In September, the Paris mint limited silver coinage, ending the double gold-silver monetary standard France had maintained for decades.
  - Earlier in 1873, the US Congress legislated the phasing out of temporary Civil War paper currency to replace it with a gold dollar once specie payments resumed (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 consequences:
  - 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 indicators point to a severe and long recession in several countries (example: Germany’s post-1873 Gründerkrise).

### Global bimetallism and France’s stabilizing role
- Mechanics and institutions:
  - Nineteenth century currency systems tied money to precious metals (bullion); coins were minted from bullion and paper money could be exchanged for bullion at guaranteed exchange values.
  - France’s Napoleonic 1803 law paid 200 francs for a kilo of silver and 3,100 francs for a kilo of gold, establishing a fixed exchange value of 15½ between silver and gold and underpinning global bimetallism.
- Role of France:
  - France’s double price guarantee ensured quasi-fixed exchange rates between gold and silver countries, allowing France to operate as a global monetary stabilizer.
  - Bimetallism stabilized prices better than a single-metal regime because supply shocks to gold and silver partially offset one another.

### Gresham’s law and supply shocks
- Gresham’s law (quoted): “Gresham’s law” states that, in fixed exchange rate systems, “bad money drives out good.”
- Operational details:
  - If the supply of one metal increased, its market price would tend to fall, creating an incentive to convert bullion into specie at the mint’s fixed price; the relatively scarcer metal would be withdrawn from circulation.
  - This shifted specie composition toward the cheaper currency metal as long as the mint’s price guarantee remained effective.
- Historical supply shocks:
  - Until about 1850, global bimetallism operated seamlessly.
  - Large gold discoveries in California and Australia increased global gold production by a factor of 5.
  - In France, the share of gold in specie surged from less than 30 percent around 1850 to more than 85 (!) percent in the mid-1860s.
- Risk identified:
  - If gold crowded out silver entirely from French specie, France would become a de facto gold country, breaking the bimetallic bond and splitting the world into gold and silver blocs with volatile exchange rates and prices.

### Political economy: 1860s constraints and 1870s opportunities
- 1860s dynamics:
  - France controlled and was hostage to the bimetallic system: it could deter others from changing parameters but could not end bimetallism without incurring significant costs.
  - International monetary cooperation failed repeatedly in the 1860s despite conferences and recommendations (e.g., the 1867 Paris conference recommending gold).
- 1870 geopolitical shift:
  - The Franco-Prussian War (1870) and France’s large indemnity (more than 20 percent of French GDP) constrained France’s ability to abandon silver.
  - Germany used the postwar window to pursue currency reform rapidly:
    - July 1871: Berlin mint suspended silver coinage.
    - Early December 1871: Reichstag passed a law authorizing gold coinage; governments put new gold coins into circulation by spending the indemnity.
    - July 1873: The Reichstag formally adopted the gold standard.
  - Scandinavian countries and the Netherlands also switched from silver to gold in this window.

### Breaking bimetallism and the 1873–1876 sequence
- September 5, 1873: France settled the indemnity’s last installment.
- September 6, 1873: The Paris mint limited silver coinage, thereby breaking the bimetallic bond.
- Interpretation of France’s move:
  - Ending bimetallism harmed France but harmed Germany even more because Germany held a larger pile of silver that now could be sold only at a loss.
  - Velde (2002) interpretation: new discoveries in America’s West boosted silver production in the early 1870s; France faced the risk of being swamped with silver inflows and preferred to limit silver coinage early while its silver holdings were still small.
  - France initially framed limits on silver coinage as temporary; only after Germany and others did not revert did markets conclude bimetallism was gone.
- Early 1875: Markets concluded the bimetallic bond was gone.
- 1876: France suspended silver coinage entirely, completing the transition to the classic gold standard.

### Aftermath: deflation, gold discoveries, and the belle époque
- Early gold-standard effects:
  - The gold bloc experienced persistent deflation, higher real interest rates, depressed profits and investment, and intense distributional conflicts between debtors and creditors.
  - Bimetallic lobby groups formed, and international conferences in 1878, 1881, and 1892 failed to restore bimetallism.
- New gold supply and recovery:
  - July 1886: Discovery in South Africa’s Witwatersrand region revealed an enormous gold deposit, triggering a gold boom that dwarfed earlier Australia and California discoveries.
  - The additional gold allowed liquidity-strapped economies to reflate rapidly; as deflation ended, debt pressures eased.
  - The belle époque—a period of rapid economic, technological, and cultural development—followed and lasted until World War I.
- Long-run legacy:
  - Prosperity bolstered the gold standard’s reputation; after World War I, policymakers sought to restore it, binding economies with the “golden fetters” that later amplified the Great Depression.

### Key findings and implications
- Historical findings:
  - France’s role as a monetary stabilizer under global bimetallism was pivotal; the system depended on international cooperation and France’s willingness and capacity to absorb metal flows.
  - Supply shocks (gold and silver discoveries) and geopolitical events (Franco-Prussian War and indemnity) shifted incentives and opportunities, triggering a rapid global transition to gold.
  - The transition to gold produced severe short-term costs (deflation, recession, political conflict) and longer-run reputational effects that influenced 20th century policy choices.
- Policy implication:
  - Monetary stability is a global public good that requires international cooperation; failure to cooperate can produce large economic and political costs, even when the institutional and technological context differs from the 19th century.

*Source: "Gold, Silver, and Monetary Stability," Johannes Wiegand, F&D Magazine, March 2023.*

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- **F&D March 2023: Gold, Silver, and Monetary Stability**
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_Source: https://www.imf.org/en/publications/fandd/issues/2023/03/gold-silver-monetary-stability-johannes-wiegand_