------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (December 2006)
Marc Flandreau _The Glitter of Gold: France, Bimetallism, and the
Emergence of the International Gold Standard, 1848-1873_. New York:
Oxford University Press, 2004. xxiii + 319 pp. $125 (cloth), ISBN:
0-19-925786-8.
Reviewed for EH.NET by Pierre Sicsic, Bank of France.
This is a gem of a book. Marc Flandreau's rewritten published
dissertation, _L'or du Monde_, explains how the bimetallic system was
much more stable than is usually thought, and that it helped to
buffer the shock of gold discovery in 1848 (meaning in that instance
limiting inflation). Its eventual demise in 1873 was not the result
of any economic cause (excess supply of silver, or efficiency gain of
some kind), but of the French decision to try to impede the smooth
German transition to a gold standard. Throughout the book Flandreau
does not pull his punches, making clear his many disagreements with
previous scholars.
The introduction makes the very important point that France in the
mid century was a very large country in terms of specie holdings (45
percent of its seven-country sample). Then a general equilibrium
model is set up in Chapter 1 with four demands: monetary and
non-monetary demands for gold and silver. It is shown that there is a
range of indeterminate bimetallic equilibria, and therefore that
there is no knife-edge instability in a bimetallic system, provided
one was lucky enough not to set the official silver/gold price
outside of the equilibria range.
Chapter 2 shows that gold and silver circulated together in France,
if not in Paris, using the specie surveys (Chapter 4 deals with the
same issue by estimating France's specie holdings from 1840 to 1878).
France was not in a de facto gold standard after 1848. In the same
chapter, using the Rothschild archives, internal arbitrage
gold-silver points are computed. Together with the market price in
Paris, they are consistent with some silver remaining in circulation
in some parts of the country. This is economic history at its best.
First show that some interesting outcome is theoretically possible,
then show first that it actually happened and second explain how it
made empirical sense that it did happen. Chapter 3 shows that silver
was exported and gold imported into France and examines the economics
of the exchange rate.
Chapter 5 looks at the Banque de France's policy of purchasing gold
and making payments in silver, and concludes that this policy was
merely "surfing on a market wave" - that is following market signals.
Chapter 6 depicts the business plan of the old Haute Banque
(Rothschild), which involved arbitrage between markets (Paris and
London), as well as trading in local markets and the industrial
activity of minting.
Chapter 7 starts by quoting inflationary fears in the mid 1850s after
the gold finds in California and Australia. Then it explains that the
net goods exports had to balance the specie flows, and that the goods
flows are consistent with a wealth effect enriching people from
countries were gold was found. The model of Chapter 1 is then
estimated with France monetary holdings and world stocks of the two
metals. The "lost secret" of bimetallism's stability shows up in the
variables used for this estimation. There was a sustained production
of silver, 5 billion francs vs. 12 billion francs of gold were mined
in the twenty years up to 1870, while the gold stock held in France
increased from 1 to 6 billion francs and the silver stock decreased
from 2.5 to 1 billion francs. Bimetallism was indeed a remarkably
supple system.
Why then did bimetallism come to an end? Chapter 8 looks at the usual
explanations. Using simulations of his model, Flandreau dismisses the
excess supply of silver - even after the German shift to gold. German
holdings in silver were 1.9 billion francs. The sound money view
according to which gold standard was less inflationary than
bimetallism is dismissed because of anachronism: in the
mid-nineteenth century, the gold standard was inflationary. Finally
the transaction cost argument is refuted because small change was
indeed provided by coins with a lower silver content, and because the
freight and insurance cost of bullion shipment was linked to the
value and not to the weight of the shipment.
France decided to demonetize silver to bother Germany, which had to
unload its silver when it adopted of the gold standard. Germany's
adoption was made possible by the 5 billion franc war indemnity paid
in international bills, most of them convertible into gold. In this
coordination problem (i.e., Franco-German rivalry) lies the reason of
the accidental demise of bimetallism. At this junction one would like
to be told why Germany decided to shift to the gold standard.
Two points are made in the conclusion. The first one is that global
financial integration existed much before the gold standard. This is
true for co-movements of interest rates and bullion flows. This is
not as true for financial flows. The second one is that the gold
standard enabled concentration of bullion holdings in central banks.
Thus the primary responsibility for managing the global monetary
system was taken away from private concerns (the "market"). It opened
the way to the nationalization of money, and macroeconomic rules
became essential: "the question revolved on the 'credibility' of
monetary institutions, which boiled down to making sure that they
behaved as though the did not exist." In the end Flandreau concludes
that the gold standard was modern, even though private arbitrages
under bimetallism were pretty sophisticated, because it opened the
way to macroeconomic monetary policy, and was bound to give way to
managed currency.
I have a slight disagreement with Flandreau about his criticism of
the fundamentals theory of the end of bimetallism. While I am
convinced that bimetallism could have been maintained in France (and
in the U.S.) in 1873, I think the fundamentals theory would have
eventually led to its end at a 15.5 (or 16) to 1 relative price after
1890. It would be interesting to keep simulating the model used in
the book with metal output up to 1895. Moreover, as stated in chapter
1, monetary demand depends on the expected purchasing power of the
specie balances. Therefore, an expected surge of silver mining might
lead to an expected loss of purchasing power of silver, and decline
in silver money demand. With perfect foresight, bimetallism breaks
down as soon as the silver output surge is expected.
Finally, after reading _The Glitter of Gold_ I went back to the
famous "crime of 1873" counterfactual by Milton Friedman. I now
believe that the most relevant counterfactual is that the U.S. and
France would have remained on bimetallism, for less than twenty
years. Then the "sophisticated" simulation with the silver price
going down to 23.7 is much less likely than the 16 to 1 simulation. I
find it interesting that the deflation in this (likely) simulation
also provided by Friedman is very close to the actual deflation,
while it disappears in the "sophisticated" simulation.
Everyone interested in monetary history or in mid-nineteenth century
French economic history should read Marc Flandreau's book. If in a
hurry and with some prior knowledge of the bimetallic issues, read
the first two chapters, jump to Chapter 7 parts 3 to 5, and then to
Chapter 8 part 2 and the conclusion.
Pierre Sicsic, who is director of the Balance of Payments in the Bank
of France, is the author (with Pierre-Cyrille Hautcoeur) of "Threat
of a Capital Levy, Expected Devaluation and Interest Rates in France
during the Interwar Period," _European Review of Economic History_,
1999.
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Published by EH.Net (December 2006). All EH.Net reviews are archived
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