The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848-1873

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THE GLITTER OF GOLD

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The Glitter of Gold France, Bimetallism, and the Emergence of the International Gold Standard, 1848–1873

MARC FLANDREAU

Translated by OWEN LEEMING revised and enlarged by The Author

Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Bangkok Buenos Aires Cape Town Chennai Dar es Salaam Delhi Hong Kong Istanbul Karachi Kolkata Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi São Paulo Shanghai Taipei Tokyo Toronto Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Marc Flandreau 2003 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2003 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose this same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available ISBN 0-19-9257868 1 3 5 7 9 10 8 6 4 2

For Mathilde

vi There are three roads to madness: love, ambition and the study of bimetallism. (A. Trollope) All that is gold does not glitter. Not all those who wander are lost. (J. R. R. Tolkien)

Preface Deciding whether or not to publish a translation of my book L'Or du monde caused me a good deal of hesitation. A priori, the exercise promised to be boring. It required reopening old ﬁles, which I had not only shut down long ago for what I thought was an unlimited time, but which in addition used early versions of one popular brand of software whose maker is renowned for his products being unusable by their own later versions. Moreover, pieces of the picture had already appeared in English-language journals and had hopefully been read by the same people who might be interested by this book. If they wanted the whole story—well, I decided they would have to study French. But people turned out not to study French. And this gradually became a problem as controversy took on, and as several aspects of the views developed in the following pages began being discussed in English-language works. The result was that material relevant to some aspects of the discussion remained basically inaccessible to the general reader: this material makes up the entire subject of Part II of this book, and large chunks of Parts I and III, which in retrospect do contain some of the most important aspects of the argument, again from the vantage point of recent debates. Economic historians have become aware of the main thesis put forward here—that bimetallism could have survived and that the emergence of the Gold Standard was not an inescapable outcome—this having been the subject of a 1996 paper in the Journal of Economic History. But several other themes, equally or more important in my opinion, have so far remained out of the discussion. They revolve around the following. The same movement that has led to seeing, inappropriately I believe, the Gold Standard of the late nineteenth century as the result of a natural and inevitable trend has also led researchers to downplay the importance of previous regimes, which have therefore gone largely unstudied—shockingly when one thinks of the massive amount of literature dealing with the period 1880–1914. It is as though the international monetary system was born in 1873, and nothing, or nothing worthy of interest, had existed before. This situation is to be deplored. It means that huge portions of global monetary history and the lessons they may carry for us stay in the dark waiting to be investigated. In the meantime, the bulk of research is inexorably attracted, just like night insects, by the glitter of the Gold Standard. This is a pity, especially at a time when economic globalization should be forcing scholars to follow every possible lead in order better to understand its challenges. The consequences of this situation are compounded when it comes to European monetary history. In effect, the debate about European monetary uniﬁcation did not follow the collapse of the inter-war Gold Standard. Rather, it preceded the creation of the pre-First World War International Gold Standard after 1873. The debate about bimetallism lies at the heart of European monetary history: whence its relevance to understanding the monetary infrastructures of the time and

viii

PREFACE

subsequent dynamics. Without a proper knowledge of the monetary regimes that held sway in Europe during the ﬁrst three-quarters of the nineteenth century, there is little chance that anything meaningful can be said about the long-run trends of European economic integration. The views developed in this book have thus a strong and deliberate European bias, and this explains the emphasis on transaction costs and geography. As will be seen, the question of economic closeness is at the heart of many chapters, and I believe that this theme is a distinctive trait of European economic history. As a result, the following is as much an essay on monetary geography as it is a ‘counterfactual’ assessment of the emergence of the Gold Standard. These ideas were very much on my mind when I worked over the translation—in cases greatly expanding, in cases cutting, some elements of the French version. In the end, while this book is and remains a contribution to the debate on bimetallism and commodity money regimes, it is also an attempt to lay the foundations of a better understanding of European and international monetary relations in the nineteenth century. Bricks and mortar, it turned out, were desperately needed to progress in this direction. This meant providing a lot of hardware, which I hope may help future researchers working on related topics. More precisely, this book provides insights on four essential issues—essential because the researcher studying international monetary relations before the formation of the Gold Standard is bound to run into them—or they will run into him. The ﬁrst is the problem of exchange rates under alternative commodity money systems—be they gold-based, silverbased, or bimetallic. The literature on these matters is wanting, full of errors and misunderstandings. This has obscured the discussion of the signiﬁcance of exchange rate movements to the point where almost nothing is known once we move away from the comparatively comfortable territories of the ‘classical’ Gold Standard. The methodology and concepts laid out in the following chapters can fairly readily be applied to any other setting and should thus serve, beyond the French experience, to investigate other facets of the pre-1873 period. The second issue is the determination of ‘money stocks’ in ‘early’ (by modern standards) periods. Because of problems with bullion ﬂows statistics, measure of the ‘money supply’ in commodity money systems remains elusive. This littleacknowledged fact results in a good deal of imprecision and guesswork when it comes to discussing the international adjustment mechanism under a commodity standard. While many theories exist on how commodity standards systems work, starting with Hume (1758), there is virtually no statistical base to test alternative views on the matter. The method developed here for assessing France's stock of circulating coins relies on techniques that take these challenges into account. They can readily be replicated for the countries where similar sources exist and where they do not, they should provide some caveats on the possible pitfalls that scholars are bound to face. At the very least, I should like to emphasize that the foundations on which we have been living are very fragile ones and that a thorough reassessment is now in order. The third issue is possibly an area of considerable promise for future research. It is the discussion of ‘central banks’ (or more adequately ‘banks of issue’) policies and operations before the late nineteenth century. Here again, one cannot avoid being

PREFACE

ix

deeply dissatisﬁed with the simple-minded way in which the development and policies of ‘modern’ central banks are commonly analysed. The conventional debate on ‘the rules of the game’, which generations of writers feel compelled to embark on, has done much to keep our understanding of these matters in a prehistoric state. The portrait of the Bank of France in Chapter 6 may surprise many. I suspect that what I describe, however, is fairly typical. Future research will have to accumulate a sufﬁciently large number of other ‘case studies’ before we begin understanding the making of ‘modern’ monetary policy. The ﬁnal issue is concerned with the way we practise economic history. When we seek to understand ‘globalization’, or the way ﬁnance ‘internationalizes’ in history we need to be able to track not only the macroeconomic dynamics at work but also the way these forces are set into motion. This means that a keener understanding of microeconomic constraints is essential to a proper description of historical processes. While the standard ‘time series’ history remains an inescapable step in identifying regularities, trends, correlations—what we call ‘facts’—their proper interpretation hinges on the ability to understand how the division of economic labour allocates the burden of adjustment across economic groups and, through that process, determines the actual way a given economic regime operates. To be more precise, my writing of the history of bimetallism would have been wholly different, had it not been for my rash desire to discover how bimetallic arbitrage ‘truly worked’. This desire led me into the Rothschild archives and fundamentally reshaped my views. An economic history that comfortably limits itself to working with published time series or numbers obtained over the Internet to ‘test’ modern theories on old data would be limping at best. If this book were to be of some help to scholars interested in monetary history and contribute to a much-needed research effort on early monetary history I would be delighted. If only I managed to persuade readers that some of the matters raised here are important, then this translation would deﬁnitely have been worth my while. But I hasten to add that, in the end, I tremendously enjoyed working again on a topic and a period which still fascinates me, so that, in one sense, I am already rewarded. And if I succeed in communicating some of this excitement to the reader, then my balance is in surplus. Paris 23 September 2002

Preface to the French Edition (1995) This book began with an exploration of the history of the Latin Union, the 1865 monetary treaty concluded between France, Belgium, Switzerland, and Italy. The abundant and largely unexplored sources of the period soon revealed just how important the debates over the ‘Monetary Question’, as it was then called, were. The Latin Union experiment, which was closely linked with these debates, continues to arouse interest as a pioneering ancestor of modern European monetary uniﬁcation. Unfortunately, its study could also be a source of anachronistic comparisons and irrelevant judgements, because the mid-nineteenth century European monetary world cannot be apprehended unless we make an effort to imagine the monetary structures operating in those days. With this effort of imagination, the nineteenth century might unfold itself as an inexhaustible store of inspiration for understanding the modern European monetary realities. The period of the Second Empire in France was marked by an extraordinary boom in interest for things economic. But in all the discussion that took place, nothing surpassed the arguments over the French monetary system, whose principles had been deﬁned in the so-called Germinal Law of 1803. This was true in terms of quantity—these arguments produced a vast outpouring of ofﬁcial reports, surveys, polemical writings, and scientiﬁc treatises. But this was also true in terms of substance: in many ways, these debates sowed the seeds of modern monetary institutions. There were several reasons for this brusque surge of passion. The Industrial Revolution, the increasing demand for credit, the acceleration of international trade, and the massive growth in capital ﬂows exerted heavy pressures on the old system. They created a favourable milieu for the emergence of new principles. Napoleon III, when he recruited his ‘special men’, the likes of Chevalier and Schneider, upon his accession, gave ofﬁcial sanction to the entry of economic expertise into politics. From then on, any discussion of trade, currency, or ﬁnance had to take heed of scientiﬁc opinion. Yet monetary economics was still an infant science. Since it was a matter of concern to everyone, every single merchant and banker chimed in. The extension of the right to vote magniﬁed the phenomenon. By broadening the base of political society, it provided the debates on the distribution of monetary power with a larger audience and greatly boosted their impact. From many points of view, the ‘Monetary Question’ debate reminds us of the controversies in England in the ﬁrst half of the nineteenth century: ‘bullionists’ versus ‘anti-bullionists’, and ‘banking principle’ versus ‘currency principle’. T. E. Gregory's opinion of them (1929) could well be applied to the French case. The student who turns from the literature of the Heroic Age of British monetary controversy in order to attempt a study of the original sources relating to the antecedents of our modern banking situation will ﬁnd himself confronted with a jungle of blue books and Parliamentary discussions, pamphlets and tracts and leading articles: a jungle at ﬁrst sight so impenetrable that

PREFACE TO THE FRENCH EDITION (1995)

xi

he may well despair. For it is characteristic of the period of middle-class ascendancy after 1832 that it produced much heat and little light; many massive volumes of evidence and statistics, but no classic reports; much legislation but, for a long time at least, no ﬁnal solution of the various problems to be faced. A path through the French ‘Monetary Question’ jungle, although less often explored, is perhaps easier to beat. Put very broadly, the debate pitted two ideological models against one another. The ﬁrst, upheld by traditional liberals such as Chevalier and Parieu, was grounded on the teachings of Jean-Baptiste Say. Its thesis was that monetary organization should rest on a private (and thus ‘naturally’ international) base. It stated that money draws its value from its nature as commodity and should therefore be managed by the market. The second model was private and national. It was advocated at ﬁrst by only a few economists (such as Wolowski, Léon Say and the Saint-Simonian, Laveleye). These views were less a repudiation of liberal dogma (to which they wholeheartedly adhered) than an amendment to it. Previewing the later thesis of the German Historical School, these authors claimed that money's purchasing power stemmed not only from its nature as commodity but also, and primarily, from the special function vested in it by the economic community: money was an institution, or better still, a ‘public good’ as we would say now. It therefore ought to be placed under State control. State intervention, properly supervised, was a desirable thing. For some 30 years, these two theses (both emanating from the liberal bourgeoisie) battled each other in domains whose apparent diversity has often had researchers puzzled. In France, as in England, about-turns, conversions, and betrayals were commonplace. Yet the frontline remained astonishingly stable, and encompassed various battlegrounds. Be it in the debate over free banking (‘La Question des Banques’), in the dispute between monometallism and bimetallism (‘La Querelle des Etalons’), or again in the controversy on global monetary uniﬁcation (‘La Question de la Monnaie Cosmopolite’), we ﬁnd the same political and economic divide, and most often the same antagonists on either side. On the one hand ‘market’ advocates pleaded for several institutes of issue, whose solidity (measured by their ability to cash their notes into bullion) would be monitored by private agents. The same derided the attempts of bimetallic systems, which they considered futile, to ﬁx the relative values of gold and silver by law. And when it came to monetary uniﬁcation, they proposed an international agreement of peoples to choose which commodity standard should be adopted internationally for achieving world monetary unity. The supporters of the public solution, for their part, favoured entrusting monetary authority to a central institution, which would hold the monopoly over issuing money and would be bound by rules laid down by the community. They strove to show that, where money was concerned, it was sometimes possible to bend the market to the government's will. The Germinal Law, they claimed, had succeeded in setting the relative ratio between gold and silver. Some of them later suggested that world monetary unity would be accomplished by coordinating the different national legislations around a common gold-to-silver ratio.

xii

PREFACE TO THE FRENCH EDITION (1995)

History did not grant total triumph to either of the rival models; rather it produced an odd amalgam of both of them. The emergence of the Gold Standard in France, in Europe, and in the rest of the world was anything but a coordinated operation. While it did anchor most nations to a common metallic monetary base, it also increased the power of the central banks (as they began to be called around 1870), which found themselves entrusted with the task of making the transition to gold and liquidating silver. The coming of the Gold Standard was thus a kind of ﬁrst step in the ‘Great Transformation’, as Karl Polanyi (1944) termed it, through which the monopolies of issue acquired a vice-like grip over the life of the economy—a grip so strong that today's economists are almost incapable of imagining money without the central bank. An investigation of the ‘Monetary Question’ leads us back to the origins of our modern monetary system. This is why understanding it is so important. France's and Europe's vacillations between the State and the Market would not for a long time again offer such a spectrum of choices and possibilities. Countries stood at crossroads. No doubt that an analysis of the dynamics of the time should shed some light on the apparent paradox of the birth of the modern States in the context of nineteenth century laissez-faire. An exploration of this kind could not be undertaken in one fell swoop. The mass of documents, the complexity of the issues, and the thematic structure of the problems make it impossible to include every aspect of the ‘Monetary Question’ in a single book on economic history. A ﬁrst phase of building seemed to me essential: it consisted in examining what Fernand Braudel calls the ‘long haul’, and grasping the workings of a monetary system that was at once the context and the subject of the arguments of the time. By uncovering the deep foundations of how money was organized from 1848 to 1873, one could hope to set in a new perspective topics that are still relevant today, and open ground for future research. That is the purpose of this essay in economic archaeology. Berkeley, California October 1993

Acknowledgments This book has evolved over such an extensive course of years and has involved so many persons that it is almost impossible to thank all of them. I shall nonetheless try. Jacques Rougerie must be credited or blamed for my becoming an economic historian. He opened my appetite and encouraged me to go West. Barry Eichengreen in Berkeley played a decisive role. Over the course of years it has been an immense pleasure to learn, study, publish, and disagree with him. It is no hyperbole to say that all the chapters in this book were shaped, in one way or another, by our long discussions, in Berkeley and elsewhere. Charles Wyplosz must be thanked for having made this encounter possible. The warm welcome of Gavin Wright and Avner Greif in Stanford prolonged Berkeley's sunny season. Avner was the ﬁrst to suggest that I should write an entire book in English. The kind comments of Michel Aglietta, Carlo-Maria Cipolla, Marcello de Cecco, Milton Friedman, Charles Kindleberger, and Maurice Lévy-Leboyer encouraged me to persist. Back in France the hospitality of Jean-Paul Fitoussi at the Observatoire Français des Conjonctures Économiques enabled me to do it. Since 1994, I have been intellectually supported by my friends and colleagues from the wonderful community of international macroeconomic historians: Pablo Martin Acena, Mike Bordo, Steve Broadberry, Forrest Capie, JeanPierre Dormois, Niall Ferguson, James Foreman-Peck, Charles Goodhart, Harold James, John James, Pedro Lains, Alan Milward, Larry Neal, Patrick O'Brien, Leandro Prados de la Escosura, Jaime Reis, Albrecht Ritschl, Massimo Roccas, Pierre Sicsic, Nathan Sussman, Giuseppe Tattara, Eugene White, Geoffrey Wood. They have helped me in more ways than one. Finally, the English edition would never have come through had it not been for some additional help. I wish to thank Andrew Schuller at Oxford for his kind and continued interest. Monique Trédé at the École Normale Supérieure for her ﬁnancial and moral support. Gérard Grunberg at Sciences-Po for his scientiﬁc and material help. Carmen Mitréa for her sustained hunt for references and original quotes. Owen Leeming, the translator of this book, for his very careful work and gigantic patience as I kept adding extensive revisions and reworking his draft. And ﬁnally Marie-Annick Payen for very efﬁcient supervision of the entire process.

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Contents List List List List List

of of of of of

Figures Tables Illustrations Maps Boxes

Introduction King Bullion: the international monetary regime, 1848–73 1.Bullion and international monetary relations before 1873 2.A bimetallic puzzle 3.Methods and controversies Part I.The Logic of Arbitrage 1. Bimetallism in Theory 1.Is Bimetallism Possible? 2.A general equilibrium model 3.Locating bimetallic equilibria: Walras's conjecture 4.Coordination 5.A simple application 6.Conclusion 2. Gold–Silver Points: Domestic Arbitrages and the Bimetallic System 1.Questions of method: A test in the spirit of O. Morgenstern 2.The geography of arbitrage 3.Gold–silver points and the commercial ratio: a test 3. Bimetallic Exchange Rates: An Exploration 1.Bimetallism and the balance of payments: The case of a large open economy 2.The problem of bimetallic parities 3.'Bullion points' and arbitrated pars of exchange 4.Constructing the bullion points 5.The bimetallic 'snake' 6.1850: A case study 7.Conclusion

xviii xx xxi xxii xxiii 1 2 6 9 15 16 19 21 23 24 27 28 29 34 39 47 49 52 57 61 68 70 73

xvi

CONTENTS

4. Coin Memories: New Estimates of France's Specie Stock (1840–78) 1.Estimating France's specie stock: from art to science 2.Foville's method 3.Other methods, other problems 4.Currency demographics: age and generation 5.The model 6.New estimates of French metallic currency, 1840–78 7.Conclusion Part II.Policy and Proﬁt: The Microeconomics of Bimetallism 5. The Rules of the Bimetallic Game 1.Rules of the game, 1: The Banque de France's rational payment policy 2.Rules of the game, 2: Reserves management and the double standard 3.Rules of the game, 3: Specie purchases, monetary policy, and bimetallism 4.Conclusion: The Banque, the bankers, and the double standard 6. Scale and Scope: Coinage, Arbitrage, and Bimetallism 1.Scale, scope, and arbitrage 2.The global arbitrage system: organization and operation 3.Conclusion Part III.Macroeconomics: Bimetallism's Success and Failure 7. How did International Bimetallism Work? A Monetary Theory 1.Hanging controversies 2.Some analytics 3.Monetary theory of international bimetallism 4.The balance sheet of bimetallism 5.Conclusion 8. The French Crime of 1873: An Essay in Interpretation 1.The end of bimetallism: One body and four suspects 2.A new view of the emergence of the international Gold Standard: The strategical theory reconsidered 3.Conclusions Conclusion The Glitter & the Shine Appendix A Appendix B Appendix C

75 76 77 81 84 88 90 95 99 103 110 113 124 128 131 141 149 157 159 163 167 171 173 175 177 193 208 211 217 220 222

CONTENTS

Appendix D Appendix E Appendix F Appendix G Appendix H Appendix I Statistical Annexes Periodicals Sources and References References Index

xvii 228 230 232 233 235 238 240 286 287 292 312

List of Figures 0.1 1.1 2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 7.1 7.2

The commercial ratio in London (1800–1900) The bimetallic equilibria and the economy's resources The gold–silver points and the ratio in London according to (a) Friedman and (b) Ernest Seyd Regional arbitrage in a simple geographical model: (a) Before gold discovery; (b) Gold discoveries drive silver out from the centre; (c) Silver only left in outer boundaries Proportion of silver in the Banque de France's reserves: Paris and provincial branches Bimetallic arbitrages on the Paris market 1851–70. Percentage variation from 15.5 parity, upper bound, and lower bound The commercial ratio in Paris, London, Hamburg France and the London silver market Net specie imports and commercial ratio 1846–70 (franc millions) Exchange rates and monetary pars: An unstable relationship Exchange rates and arbitrated pars The gold points and the exchange ratio The silver points and the exchange ratio The bullion points and the exchange ratio Distribution of the exchange ratio within the gold points and the silver points (proportion of observations in each segment): (a) January 1848 to December 1865, (b) January 1866 to September 1870 Constriction and dilation of the bullion points The ‘crisis’ of 1850 Commercial ratio and coin-minting (franc millions): upper part of y-axis—silver coinage, lower part of y-axis—gold coinage Foville's ratio (per thousand) France's specie supply Money supply and Gresham's law (franc billions) (a) Banque de France silver reserves and French gold in circulation (franc millions), (b) Banque de France gold reserves and French silver in circulation (franc millions) Commercial ratio and metal used for payments Silver reserves in Paris and the Banque de France's ‘errors’ (franc millions) The Banque de France and the gold market (1848–70) Banque de France reserves, gold purchases, and monetary policy (franc millions (reserves: left axis) and % (interest rate: right axis)) Exchange rate, gold points, silver points, and gold purchases (1 = Parity) Share of each minting shop in the production of 5-franc écus 1829–52 Share of each minting shop in the production of 20-franc napoléons 1845–70 Silver exports to Asia (British ﬁgures) (millions of £) Net silver imports into India and available silver resources (millions of £) Wholesale price indexes in France, England, Germany, and ‘Asia’

6 26 33 36 37 45 49 50 52 56 60 64 64 65 66 69 72 76 85 92 94 104 111 111 114 119 121 140 143 147 160 166

LIST OF FIGURES

7.3 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8

Gold and silver stocks in France: Observed and predicted patterns Annual production of gold and silver 1849–85 (FF millions) Could bimetallism have survived? German circulation (mark millions) Why Germany's reform did not matter Shipping costs between Paris and London 1850–80 Maturities of Mint vouchers and silver depreciation Price of silver and écus on the Paris market Banque de France reserves as % of circulation

xix 173 180 182 184 186 191 203 204 205

List of Tables 0.1 0.2 1.1 2.1 2.2 3.1 4.1 4.2 4.3 5.1 5.2 7.1 7.2 8.1 8.2

Western Specie supplies circa 1860 Pound sterling variation coefﬁcients (%) ‘Monetary’ and ‘non-monetary’ demand for bullion The gold–silver points and bimetallism 1850–70 according to Seyd and Friedman Cost for an arbitrage involving 1000 francs Estimated international arbitrage costs broken down by main item (‰) Silver: R2 = 0.99; Durbin–Watson = 1.7; Number of observations = 81 Gold: R2 = 0.99; Durbin–Watson = 2.27; Number of observations = 73 Specie per capita (in francs) (circulation less central bank reserves) Chronology of payments policy, from Minutes of the General Council 1850–4 Bank of France gold purchases 1855–1864 Simple correlation of inﬂation rates in the three blocs Estimation of system 7.7a European and intra-European trade Coinage of écus and issue of Mint Vouchers following restriction on minting (francs)

4 7 17 34 44 63 89 89 93 108 126 168 172 193 207

List of Illustrations 3.1 Tate on arbitrated parities 8.1 Seyd on shipping charges 8.2 Parieu, bimetallism, and the Gold Standard

59 188 201

List of Maps 2.1 2.2 6.1 8.1

Gold and silver circulation in France, 1857 enquiry Gold and silver circulation in France, 1868 enquiry Bullion routes: Rothschild Frères' network and international arbitrages, 1835–75 Votes of the chambres de commerce (1868)

38 39 148 194

List of Boxes 3.1 4.1 7.1 8.1

Estimating the costs of international arbitrage What do the monetary surveys tell us? Purchasing power parities and inter-bloc price correlation Evaluating the structural effects of the German reform

62–63 82 167 187

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Introduction King Bullion: the international monetary regime, 1848–73 Until now there has been a tendency to consider the history of precious metals as an unilateral, continuous process…. It is difﬁcult to maintain that, for the period under study, there are speciﬁcally autonomous histories of the different forms of currency, that there are separate histories of gold, of silver, of copper, and, beyond these, of credit. Their functions were, in realty, closely linked one with another. Frank Spooner (1972: 2) The pages that follow examine the operation of the international monetary system during the time stretching from the ﬁnding of gold in California in 1848 to the emergence of the Gold Standard as an international regime in the 1870s. Their main contention is that these years, far from being an era of transition before the making of a true global exchange rate system, displayed a consistent international monetary regime which we suggest to call international bimetallism. This regime, we argue, rested on the interaction among a ‘gold bloc’ and a ‘silver bloc’ with the French economy acting as a pivot-point in relation to them. This idea runs counter to conventional thinking on the monetary history of that period. Economists, like historians, tend to downplay the importance and speciﬁcity of the international monetary relations that prevailed before the establishment of the Gold Standard. They generally award Great Britain the star role in the history of international monetary relations, to the point of confusing world dates with British ones. Anna Schwartz and Mike Bordo, for example, set 1821, when the Bank of England resumed its payments in gold a few years after the end of the Napoleonic Wars, as the start of the Gold Standard, as if no other country had existed (Bordo and Schwartz 1984). Such a view can possibly be justiﬁed as regards the latter part of the nineteenth century, when the Gold Standard became general and a number of Continental central banks took to holding London balances as an active part of their reserves, but it is much more questionable when it comes to the period prior to 1880.1 At least up to the 1870s, bank of issue reserves consisted almost entirely of bullion.2 In such a setting, it is hard to see how Great Britain, with not even one-ﬁfth of the industrialized countries’ metal

1

It may be remarked that, even in the period 1880 –1914, credit held with Paris and Berlin outweighed, in the assets of several Continental central banks, credit held with London. See Lindert (1969).

2

With the exception of certain countries such as Belgium which, as early as the 1850s, began managing a foreign bills portfolio. See Kauch (1950).

2

INTRODUCTION

holdings, could wield much inﬂuence single-handed over other countries; especially so as it used gold only, whereas more than half of the world's circulation was in silver. Many authors likewise consider that the ‘Gold Standardization’ of the international monetary system in the late nineteenth century was manifest destiny, as though generalization of the British system was an economic imperative. It is true that an alignment on the British ‘model’ occurred and that the pound was founded on gold. But to go from that to putting ‘British superiority’ and gold in the same basket is more than an exaggeration: it is fetishism. Such fetishism, which brings to mind other scholarly debates over the Continent's backwardness,3 belongs to a long tradition. In the second half of the nineteenth century, most economists held that gold was the prime currency by right, and that other standards (iron, bronze, silver, in ascending order) were steps up the ladder established by Great Britain. It was Hesiod's Theogony revised in the light of the Industrial Revolution. Marx wrote, for instance, that ‘iron acts as a measure for black people, but seashells and the like are a better indication of the series which culminates in gold and silver’.4 In the same vein, silver was for Parieu the metal of the ‘lesser breeds’,5 or, for the statistician Soetbeer, of the ‘barbarian nations’ (Soetbeer 1889). Laughlin (1896) believed that the transition from silver to gold was a sign of unstoppable progress, just like the transition from the horse and cart to the steam engine. There is no dearth of such quotations. The oddest thing about this view is not its naive and endearing positivism but the fact that it was later widely reproduced (Cooper 1982, Redish 1990). This kind of linear account of monetary and ﬁnancial development falls decidedly short of the mark when a world view is taken. It assumes that the history of each nation can be written without considering interaction with other countries, and that each separate experience can have its own meaning, detached from what is happening in general and from the accompanying macroeconomic constraints. England may well have served as a ‘model’ for its eager rivals. Yet, within the international monetary system, it was merely one of a number of players. It was an important one, certainly, but it was quite incapable of exerting a unilateral inﬂuence on other nations. An international system is made of complex feedbacks involving all parts. It would seem more promising therefore to study national destinies as part of an interactive whole rather than measure them by the yardstick of the United Kingdom.

1. BULLION AND INTERNATIONAL MONETARY RELATIONS BEFORE 1873 The international monetary system on which this book focuses could be roughly likened to an ediﬁce built on precious metals. In this regime, coins of gold or silver, whether hoarded or in circulation, were the supreme monetary expression, the ‘highest powered

3

See Crouzet (1985).

4

Principe d'une critique de l'économie politique, ébauche 1857–1858 (Vol. 2, Pléiade edn. 1968: 220).

5

For a bravura performance on this subject, see his speech at the 1867 International Monetary Conference.

KING BULLION

3

money’.6 Coins were the benchmark asset, the one in which transactions were denominated, which had to be surrendered for paying debts and which the creditor could not refuse, for they were legal tender. Of course, monetary substitutes had always existed and their use considerably expanded during the nineteenth century: the supply of notes, deposits, private bills (that is, private pledges to pay a given amount at a given time and place) increased throughout the period under study (Lévy-Leboyer 1977b). Yet this expansion had itself been largely sustained by specie in regimes where sooner or later, metal had to come into play. On the domestic front, the rise of banks of issue and commercial banks was matched by a great increase in paper and deposits. Clearing agreements and notes took precedence over gold or silver, but only to the extent where deposits could be cashed against notes and notes in turn remained convertible into bullion at sight. To make doubly sure, a huge fraction of the ‘national’ bullion stock remained in the hands of private agents, not in those of central monetary institutions even where these were the most developed and ‘credible’. For external dealings, bills of exchange predominated throughout the entire century.7 Yet when imbalances occurred between two ﬁnancial centres—that is, when one found itself short of goods or credit with respect to the other—metal once again came to the fore and ﬂowed to clear international books. This was all the easier since, while most goods were subject to often hefty customs duties, gold and silver circulated freely from country to country. This was a relic of the old mercantilist policies—gold and silver had been exonerated from tariffs to make it easier to import them. Specie thus served as the vehicle of choice for the world economy. As a result, the international monetary landscape looked very much like what Viner (1937) deﬁned as a ‘simple specie currency system’, that is, a system where payment imbalances among nations were offset by specie ﬂows proceeding from private sources.8 A few ﬁgures (Table 0.1) will give an idea of the prominent role of metal in the major industrialized countries. On the Continent, during the 1860s, specie accounted for somewhere between one-half and three-quarters of the money supply (measured by combining metal, notes, and deposits). The proportion was lower ( but still substantial) in Great Britain and the United States, where the supply of deposits was large. France was undeniably the big metal reservoir, holding nearly half of Europe's specie supply. England and Germany, not to mention the United States, were in this respect lesser powers. As can be seen from Table 0.1, precious metal holdings were concentrated not in central bank reserves but in private hands, either for circulation needs or possibly as precautionary balances.9 Even in Germany (where the concentration of metal holdings increased in the late 1860s), the Bank of Prussia and the other banks of issue held no

6

For an overview of the role and importance of specie in France in the second half of the nineteenth century, see the article by Jeanneney in Lévy-Leboyer and Casanova (1991).

7

For Great Britain, for example, see Nishimura (1971). We may note that, in 1857 still, Banque de France notes were accepted in certain regions only upon payment of a small agio (see the 1857 Enquête monétaire ).

8

Viner (1937: 290 ff).

9

What Soetbeer (1889) called ‘latent reserves’. It is fair to wonder what these holdings, which were both highly liquid and largely stagnant, signiﬁed. They were mostly private reserves, amassed with a view to future outlays or as a shield against possible crises. To call them misers' hoards would not, however, do justice to their economic role. Indeed, bankers and many others kept positive balances of precious metal. It would be more correct to group the different metal reserves together and treat them as liquid asset holdings.

4

INTRODUCTION

Table 0.1 Western specie supplies circa 1860

Specie millions (£) Share of total (%) As a fraction of M1 (%) Central Bank (%) £ per capita (£)

Germany (1860)

UK (1868) USA (1860)

Total

33

Switzerland (1865) 8

75

103

47

560

8

6

1

13

18.5

8.5

100

78

73

56

71

76

26

20

47

14

40

19

12

18

19

38

19

6.5

2.0

6.0

3.2

1.9

4.5

1.5

3.5

France (1865)

Italy (1862)

Belgium (1885)

250

44

45

Source: Author's calculations. ‘Specie’ designates the total metal stock (including central bank reserves). M1 is measured as the sum of banknotes, deposits, and specie. Each country's share was calculated by dividing the ﬁgures in the top line by their total. Soetbeer (1889) points out that the amounts held by the other European countries can be ignored, at least until 1885. The share of bank of issue holdings in total stock is reckoned by dividing metal reserves by the top line. In the case of the United States, “reserves” are the total held in 1,601 State Banks (taken from Soetbeer 1889). Per capita specie stock (in pound sterling) is obtained by dividing the top line by total population (taken from Mitchell 1980). This explains the apparently high concentration (38%). Sources used are: Great Britain, Capie and Webber (1983, 1984, and 1985), and Cameron et al. (1967); France, total specie stock is taken from the estimates in Chapter 4, the source for notes, deposits, and cash in hand is Saint-Marc (1983); Italy, de Mattia (1990) for notes and the amount of specie, estimates by the Director of the Mint, Giuseppe Sachetti; for deposits, de Mattia (1967); for bank specie reserves, Soetbeer (1889); Belgium, Kauch (1950); Switzerland, Brammetz and Brouwer (1992); Germany, Soetbeer (1889), Tilly in Cameron et al. (1967), and Sprenger (1983); United States, Federal Reserve Board (1943), Friedman and Schwartz (1963), and Soetbeer (1889).

more than a third at most of total metal stocks, on the eve of uniﬁcation. The role of the issuing institutions was therefore minor—usually they held rather less than one-ﬁfth of the total metal in circulation—especially as the quantity of notes they issued was closely related to the size of their reserves. Quantitatively speaking, monetary power lay ultimately on the side of the market. In practice, metal ingots, rather than coined money, were the preferred means for country-to-country payments. Domestic coins were legal tender only in the internal economy: to obtain a visa for foreign circulation they needed melting and recoining. Doing so did not cost much but was enough for the preference to go to exporting ingots wherever possible. The price of ingots was just their intrinsic bullion value and they lost less than coins in the export process. Precious metal in the simplest form of bars thus constituted the key international—or, one might say, superliquid—asset.10 Bullion markets thus played an essential role in the international adjustment process, and as a result, gold and silver were traded in every ﬁnancial centre of any importance. Precious metal market operations always followed the same general principles, despite differences in institutional details from one centre to another. On the demand side, a minting shop took in the metal and turned it into coins, for a small direct (fee) or indirect (delay) charge. The minting shop (the ‘Mint’) thus determined the ﬂoor (or, in the

10

See Tooke (1844: 112 ff).

KING BULLION

5

language of economists, reservation price) which corresponded to the worst terms for which ingots of the monetary metal or metals could always be sold. Occasionally (as in London and Hamburg), a bank (normally the central bank) acted as intermediary in this transaction and took the ingots for a price the same as or slightly higher than the one offered by the Mint. In this case, the bank effectively ﬁxed the minimum price of bullion, and agents had no reason to go to the Mint. This allowed the bank to stock up its reserves directly.11 On the supply side, the monetary metal's maximum price was determined by the cost attached to melting down coins obtained in payment. Here again, a bank of issue might offer to sell ingots at a better rate and so lower the maximum price payable for procuring the precious metal, thereby enhancing the markets’ efﬁciency. For the most part, however, this practice was not binding upon issuing institutions; it was a service that the bank could provide to the market from time to time, but could suspend at will, leaving the public to supply the metal.12 Ingot prices found their level between the maximum and minimum rates, depending on requirements and resources as well as on the operations of speculators trying to guess future market needs, and the action of other players. The most striking contrast among the different nations concerned not so much monetary structures as the kind of metal used. Roughly speaking, the world before 1880 was divided into three distinct metallic blocs. The ﬁrst relied on gold, the second on silver, and the third on a double standard which allowed the use of both metals. Where this was so, a debtor could settle by paying with either silver or gold coin ad libitum. In this case, a law set the terms between the unit of account on the one hand, and the gold and silver coins on the other hand. In France, the ‘Germinal Act’ of 1803 had deﬁned the pure ore content of gold and silver monies. Consequently, a person owing 40 francs could pay with, say, either eight 5-franc silver coins or two 20-franc gold coins. This implicitly set a legal exchange rate between the two metals, an exchange rate known as the legal ratio.13 And, under the Germinal Act, this ratio was 15.5 to 1. Around 1860, the ‘gold bloc’ was made up of Great Britain, Portugal, Brazil, Turkey, Australia, and some British colonies. The ‘silver bloc’ included North and East Europe

11

In London, the Royal Mint bought gold at 77s 10½d an ounce. Technically, it coined the metal ‘free’. It nevertheless billed assays for testing the purity of the metal brought to it, worked only for amounts of more than £20,000, and imposed waiting periods of at least a fortnight (Seyd 1868: 158). It took gold in on Tuesday, Thursday, and Saturday from noon to 2 PM and demanded at least one week's notice of deliveries (Archives Monnaie, Series K, Monnaie Royale de Londres, règlement pour la réception des matières d’or ). All these restrictions made direct dealings with the London Mint irksome. The Bank of England's terms of purchase—it bought gold ‘over the counter’ at 77s 9d an ounce (therefore taking a 0.16% commission)—were therefore usually preferred (see below, Chapters 3 and 4).

12

Possibly by converting notes into specie at the central bank window. See Ofﬁcer (1986: 1066), and below, Chapter 5.

13

Until the late 1860s, the expression ‘double standard’ (‘double étalon’ in French) was used to describe monetary constitutions that allowed debtors to choose the metal of payment. The term seems to have had a negative connotation, or perhaps it did not suggest the right meaning; in any case supporters tried other expressions: Seyd (1868) suggested ‘double valuation’. At about the same time, Henri Cernuschi, an Italian political refugee in France and an economist who would become one of the major bimetallic champions of the following decade, proposed ‘bimetallism’, with enormous success (G. Leti 1936: 203). The word bimetallism was increasingly used during the 1870s. It became part of the ofﬁcial and academic language and later found its way into dictionaries of political economy, such as the Palgrave.

6

INTRODUCTION

(German States, Holland, Scandinavian States, Austria), Asia (India, China, Japan), Mexico, and certain South American countries. France, Belgium, Italy, Switzerland, which formed the Latin Union in 1865, and the United States belonged to the bimetallic bloc. (The United States, in fact, ﬂoated from 1860 onwards as a result of ‘greenback’ inconvertibility; see Friedman and Schwartz 1963). The precise membership of each group changed over time according to circumstances that will be discussed later, but the typological principle remained valid—at least until 1873, when the bimetallic economies of Western Europe started curbing or interrupting the free minting of silver.14

2. A BIMETALLIC PUZZLE The three-bloc system, unlike the Gold Standard which rested on a single metal, walked on two legs. Yet its main feature was that of an essentially ﬁxed exchange regime. Indeed, until 1873, the commercial ratio of the two precious metals on international markets (the value of a gold compared to a silver ingot of the same weight and ﬁneness) remained astonishingly stable, as may be seen from Fig. 0.1. Better still, this stability was achieved around the legal ratio of 15.5. Fig. 0.1.The commercial ratio in London (1800–1900)

Source: Statistical Annexes.

14

It should be clear that this typology refers to the ‘nominal’ standard. In practice, certain countries, such as Austria, Russia, Italy, or the United States, at various periods found themselves in a regime of non-convertible paper money. For a more detailed treatment of the different metallic blocs and their convergence on the Gold Standard, see Eichengreen and Flandreau (1996a, b).

7

KING BULLION

During the quarter-century that began with the ﬁnding of gold in California, variations in the exchange rate between the two metals did not exceed 2 or 3 per cent on either side of 15.5. This degree of ﬂuctuation is comparable, say, to that permitted by the European Monetary System until July 1993, but unlike the EMS which experienced recurrent devaluations, the parity between gold and silver was never altered. Thus contrary to what seemingly insufﬁciently informed scholars have written, the period before 1873 exhibited remarkable exchange rate stability.15 Exchange rate variation among the nations belonging to the different blocs was extremely small over a very long period of time. As Michael Collins remarks, ‘the pre-1880s stability was not as great as during the classical Gold Standard period, … {but} it does not detract from the fact that a high degree of stability also existed before 1880.’16 What we are discussing here is a truly outstanding episode of monetary stability, as may be seen from Table 0.2. This stability appears all the more extraordinary in view of the severe shocks which buffeted the system during the period. 1848 began what was a real revolution in gold production. The ﬁnds in California then in Australia in the early 1850s led to a doubling or, possibly, tripling of world gold stocks in 20 or so years, depending on what initial estimates are chosen.17 There was a boom in coin-making throughout the world as the mint shops of the leading powers began processing the bonanza. Yet the massive increase in the gold component of world's circulation had relatively little impact on either prices or exchange rates. The overall rise in price indices over the whole of the 1850s barely exceeded 30 per cent, and, in the early 1860s, it was even followed by a modest drop.18 The price rise also affected all countries uniformly, whatever their metal Table 0.2Pound sterling variation coefﬁcients (%) Compared with Franc Dollar Mark

II.1847–IV.1880 0.77a 0.67b 1.96

Notes: Roman numerals refer to quarters. II.50–IV.80 II.47–III.60 and IV.66–IV.80 I.79–II.1914 Sources: Collins (1986: 519) and Morgenstern (1959: 193–7)

a b c

15

De Cecco (1990) writes about the ‘drastic’ (!) movements in the Gold–Silver exchange ratio around 1850.

16

Collins (1986: 521).

17

See Soetbeer (1889), along with the estimates in Chapter 7, and the Statistical Annexes.

18

Price variation estimates depend on the source and index chosen. We have used the indices in Mitchell (1980).

1877–1914 0.25 0.34c 0.24

8

INTRODUCTION

standard.19 Meanwhile, since the exchange ratio between gold and silver remained constant, exchange rates between members of the gold bloc and members of the silver bloc also remained stable. For today's economists, the experience is, on many accounts, intriguing enough. What makes the episode especially exciting for us is that the world before 1880 was largely deprived of the institutional structure customarily relied upon for interpreting the action of the international adjustment mechanism. As has been said, a few central banks existed here and there, but their reserves were limited, their means were cramped, and their role was most likely not essential. Yet this did not prevent the occurrence of major adjustments on a global scale, including giant specie ﬂows spreading from country to country. Morever, the years when this process occurred were happy times for Europe. It was a period when the Continent's industrial progress accelerated, international trade expanded massively, and the ﬁrst steps on the road to Europe's economic and ﬁnancial unity took place. Not only did the pre-Gold Standard regime operate smoothly; it also coincided with prosperity. The birth of the Gold Standard, on the other hand, coincided with the start of the ‘Great Depression’ of 1873–96. The international monetary stability ‘miracle’ of the years before 1873 has sometimes been coupled with the existence of the bimetallic bloc. This conclusion follows from the fact that the commercial ratio between gold and silver remained until 1873 around the French legal ratio (Fig. 0.1). Yeager, for example, has no doubt that ‘The ratio of 15.5 to 1 ruled on world gold and silver markets because of the dominance of France's bimetallic system … Being in effect on both the Gold and Silver Standards at the same time, France was standing ready to deal in the two metals in unlimited quantities and at ﬁxed prices’ (1976: 296).20 And the drop in the price of silver after 1873 went hand in hand with the decision by the bimetallic bloc to restrict the minting of that metal.21 Lastly, as many contemporary observers were not slow to notice, much of the gold extracted from the mines in America and Australia was absorbed by France; some 30–40 per cent of it is thought to have been processed by French minting shops.22 What was the reason for such an ogre-like appetite, this auri sacra fames, this ‘sacred hunger for gold’? The explanation set out here takes as its starting-point the role of the bimetallic bloc, which provides the key to understanding the workings of the international monetary system during the period 1848–73. Viewed as a whole, the system may be said to have organized, thanks to the action of the bimetallic bloc, the combined world circulation of gold and silver at a ﬁxed exchange rate. It could therefore justly be called ‘international bimetallism’.23 What were the features of international bimetallism? How did it work?

19

See Chapter 7.

20

Yeager (1976: 276). See also Friedman (1990a, b) or Clapham (1944). Clapham is one of the rare British authors to emphasize the ‘smooth-working French bimetallic system’. For a more standard contrary view, see Cottrell (1982).

21

In France and Belgium, the minting of silver was restricted. The United States prepared for the return to convertibility on the basis of gold only.

22

See Friedman (1990a).

23

This expression was coined (no pun intended) by the Belgian economist Emile de Laveleye in 1881 as a rallying cry for supporters of a coordinated return of the double standard internationally. It referred to an international monetary system in which each country (or at least an adequate pool of countries) would pass bimetallic legislation. Technically, the system would have had the same properties as the regime of 1843–73, where a sufﬁciently important monetary power takes the initiative of ﬁxing the legal ratio. We therefore use the expression ‘international bimetallism’ to name the system which effectively prevailed until 1873.

KING BULLION

9

How was it able to inﬂuence Europe's monetary development? What constraints did it lay on the double standard countries? This book is intended to supply an answer to these questions.

3. METHODS AND CONTROVERSIES An investigation of this kind inevitable raises many problems of method. In the past, the subject has been approached from various angles, but no global account has been proposed. There is a dearth of data, and an inadequate supply of theory. What we do ﬁnd in the literature—even in its most recent developments (Redish 2000)—are either plausible explanations of things which might have happened, or circumstantial descriptions which leave the reader bemused because they are not underpinned by theory. The notion of bimetallism itself is a source of difﬁculty, requiring preliminary theoretical clariﬁcation. The debate traces back to an old controversy, begun by John Locke, that still divides economic historians and theoreticians alike. In ordinary human life there should not be a double standard; Locke believed that the same held true for monetary systems. For him money could not be based simultaneously on two metals, since a standard has to be invariable, whereas the relative commercial value of gold and silver is variable by deﬁnition. In the nineteenth century, Michel Chevalier (1851, 1866) and Stanley Jevons (1884) in turn adopted Locke's thesis. Even today, especially in American circles, this belief represents what Milton Friedman (1990a) calls ‘the conventional view’: it is the one still found in textbooks, and is known as the ‘knife edge’ argument. The government-set legal ratio is reputed to be unstable, since any deviation of the commercial rate from the legal one would lead to the melting of any metal undervalued by the law and the minting of overvalued metal. Circulation would be subject to abrupt shifts from one metal to the other (Garber 1986). The tradition has its roots in J. Laurence Laughlin's History of Bimetallism in the United States (1886).24 Laughlin, an adept of the historical method and foe of the double standard, maintained that America's experience showed that bimetallism could not last for any length of time; it would go through phases in which one metal, then the other, would act as the de facto standard, in line with Locke's principle.25 In the second half of the nineteenth century, the ﬂaws in this logic were exposed by Wolowski (1870), and then more formally by Walras (1884) and Irving Fisher (1894).

24

The book, ﬁrst published in 1886, was revised and expanded with the edition of 1896. This third edition is the reference version.

25

The second part of his book is devoted to the period after 1873, when the free minting of silver had been discontinued but silver coins were still in circulation. Laughlin, by including this regime of hampered bimetallism (dubbed ‘limping bimetallism’, see Chapter 8) in his general discussion of bimetallic regimes, confused matters durably. He helped to spread a popular misapprehension which survives even today. We shall return to this point later.

10

INTRODUCTION

Walras and Fisher showed that the knife edge argument is a partial equilibrium construct which does not meet the demands of a general equilibrium analysis. In Schumpeter's view (Schumpeter 1954), Walras and Fisher (subsequently supported by Marshall, Pareto, and Barone), by demonstrating the theoretical possibility of bimetallism, were unchallengeable in terms of strict logic. They had invented a new paradigm, that of bimetallic arbitrage. Seen from this viewpoint, variations in the two metals’ relative value are buffered by the action of arbitrageurs who adjust their metal holdings so as to restore the initial equilibrium. This conception was later endorsed by a number of economists belonging to the ‘French’ tradition, including Aupetit (1901), Nogaro (1908), Rastel (1935), and Mertens (1944). They all came to the conclusion that France's experience supported the views of Walras and Fisher.26 A second difference of opinion grafted itself upon the opposition between the ‘knife edgers’ and the supporters of bimetallic arbitrage. It was the difference between the opposite views prevailing in the United States and France. There were probably historical reasons for this. We know that the reintroduction of bimetallism was one of William Jennings Bryan's campaign themes for the 1896 Presidential elections. Bryan was defeated and the economic dream-world that he had campaigned upon threw discredit on his whole agenda.27 As Schumpeter wrote, The popular and political literature of the silver men—justice to silver; dollar of our fathers; You shall not crucify mankind upon a cross of gold—contains many arguments that kept on a much lower level than anything that can be found in the writings of the sponsors of gold. In particular, it is infested by products of a semi-pathological nature, for at that time bimetallism was the chief hunting ground of monetary monomaniacs.28 France's experience, undoubtedly more serene, probably did not leave such painful wounds—which may well explain why conventional views on either side of the Atlantic so often differ. To further complicate matters, each school has its minority view. In France, the historian Guy Thuillier (1983) tends to adopt Locke's position. On the opposite side, Friedman (1990a,b) in the United States (following studies by Martin (1968, 1977) that questioned Laughlin's conclusions) made efforts to show that the available data corroborated the bimetallic arbitrage thesis. Friedman went even further, asserting that the modiﬁcation of the double standard in 1873 reduced the different nations’ monetary base and thereby played a part in the protracted price decline that began exactly in that year and extended until the mid-1890s. Abandoning bimetallism was hence tantamount to a crime.29 It has been necessary, in order to clarify and consolidate these different approaches, to combine theoretical reﬂection with an investigation of the facts. As an essay in quantitative economic history, the research required supplementing analysis with empirical

26

See, for example, the article by Levan-Lemesle (1983).

27

See, for example, the chapter ‘Silver Politics and Secular Price Decline’ in Monetary History by Friedman and Schwartz (1963).

28

Schumpeter (1954: 1076).

29

It may be noted that the recent book by Redish (2000) suggests that Friedman did not fundamentally alter the dominant view. Rather it led to a rephrasing of the popular notion of a gold superiority.

KING BULLION

11

material. But this material was almost completely lacking at the beginning. What were needed were series for precisely tracking the relative price movements of gold and silver on the relevant markets, and for ascertaining the evolution of the world bullion stock and the monetary holdings of France, the main bimetallic nation. Arbitrage practices, exchange market operations, and the organization of coin-minting had to be minutely analysed. This book will try to persuade the reader that these seemingly arcane details are often of capital importance in assessing the validity of competing theoretical hypotheses, and thus in fostering our understanding of how bimetallism worked both in theory and in practice. Archives, periodicals, and ofﬁcial reports were therefore put to work in an effort to reconstitute as complete a panorama as possible of the operation of bimetallism. The result is a detailed study of the processes on which the regime under study rested. The aim of this travel in time—indirectly also a reﬂection on the present—was not to hatch up a provocative thesis for the purpose of stirring controversy.30 We sought rather to take a constructive route, and were mainly concerned with laying the ground for subsequent researchers who may wish to leave the comfortable lands of more recent but probably over-researched later international monetary regimes to pursue the explorations of early modern systems. For those, we hope that our analyses will prove useful starting-points and that, at the end of the book, readers will perhaps have a clearer idea of how the international monetary system functioned from 1848 to 1873. Last, a word about method. The research, located at the junction between theory and economic history, was designed to achieve two purposes. One was to show how the monetary structures (or ‘architecture’) of the time shaped, coordinated, and determined the endless variety of individual actions. The other was to suggest how the combination of these actions imparted to the monetary system from the 1840s to the 1870s its unique ‘ﬂavour’ by determining its dynamics. This intention to a large extent governed the approach taken. It was important to start with a theoretical model that would serve as a matrix for interpretation. The model also served to identify the subjects for more detailed examination. It was then gradually clothed, ﬁlled in, and illustrated with a series of studies dealing with speciﬁc aspects of the bimetallic standard's working. At the same time, the microeconomic details and partial equilibrium analyses suggested by the model are to be understood in view of their position in our general framework. They are the pieces of a jigsaw puzzle: meaningless or even deceptive without an understanding of their position or of how they should be assembled. In other words, our goal is to generate an overall understanding and interpretation of international bimetallism by going from the general to the particular and back again. To serve this purpose, the book falls into eight chapters divided into three parts. Part I, ‘The Logic of Arbitrage’ contains four chapters. Chapter 1 looks into the theoretical underpinnings of the bimetallic system and shows how important private action was in stabilizing the gold–silver exchange ratio. It demonstrates that a bimetallic constitution (in the sense of a set of rules) can produce three possible regimes, depending on bullion

30

Given the conﬂict between our ﬁndings and received wisdom, debate was anyway bound to take place and it did not in fact wait for the English edition e.g. see Redish (2000: 202–4).

12

INTRODUCTION

demand and supply. The ﬁrst corresponds to a de facto Gold Standard, the second to a de facto Silver Standard, and the third to what we shall call effective bimetallism, that is, a regime in which gold and silver circulate concurrently. Chapter 2 elaborates the methodology of the ‘gold–silver points’, making it possible to infer which of the three foregoing regimes prevailed during the period in question. Chapter 3 breaks new theoretical ground by developing a formal method for analysing bimetallic exchange rates. It shows, in particular, that the London–Paris exchange rate acted on international markets as a regulator of the ratio between the two precious metals, triggering stabilizing bullion ﬂows. These combined approaches lead to the construction in Chapter 4 of a qualitative model which builds on the logic of arbitrage to estimate a series for France's holdings of gold and silver monies. Part II, ‘Policy and Proﬁt: The Microeconomics of Bimetallism’, examines the way individual actors behaved in bimetallic regimes. Chapter 5 deals with the Bank of France's policies, not only to assess the speciﬁc nature of its action in connection with the double standard, but also to determine whether this regime was of beneﬁt to the Bank or, on the contrary, a handicap. It shows that the Bank of France, while ofﬁcially claiming (at least until the 1870s) that bimetallism helped it by giving it some leeway in the conduct of monetary policy, was actually severely constrained by the logic of bimetallism and forced to behave mechanically. Chapter 6 gives an ‘inside account’ of the workings of bimetallism, concentrating on the role of international ﬁnance in the operation of the system. It shows how global banking networks, by organizing bullion shipments and minting throughout the world, made an essential contribution to the international adjustment mechanism. Finally Part III, ‘Macroeconomics: Bimetallism's Success and Failure’, assembles the ﬁndings of the previous Parts to provide a new view of how the international monetary system 1848–73 operated. Chapter 7 runs a model that explains metal ﬂows within and outside the French economy from variations in the world's gold and silver stocks. The model shows that global monetary equilibrium, and more particularly money ﬂows between Europe and Asia, grew from the interplay of global demand (size of economies, degree of reliance on metal) and global supply. Chapter 8 draws on this model to elucidate the reasons for the system's collapse after 1873. Traditional interpretations, according to which the failure of bimetallism and emergence of the Gold Standard were more or less inevitable, are rejected. A new explanation is advanced. It stresses the emergence of the Gold Standard as the outcome of a failure in institutional coordination. It shows also that the inter-war year problems of the Gold Standard (Eichengreen 1992a) were already in germ at its inception. The inference is that the classic opposition between a successful Gold Standard (pre-1914) and an unsuccessful one (1925–31) is completely unfounded. The Conclusion wraps up the argument and offers thoughts for future research.

I The Logic of Arbitrage

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1 Bimetallism in Theory It is Jevons’ contention … that bimetallic systems are essentially alternating Standards, in the sense that there is only one metal in circulation—gold at certain periods, silver at others. But, positively speaking, this is an error. Analysis proves—and experience shows—that bimetallism can work. Léon Walras (1881) reprinted in Walras (1988: 513) Why should one writer who sees that the value of money is ‘ﬁxed’ by its value as merchandise quarrel with another who insists on the ‘quantity theory’, and why should those who go back to cost of production deny any possible inﬂuence of a bimetallic ratio? These disputants tacitly assume that a variable cannot satisfy more than one law, and ignore the supreme mathematical principle that ‘necessary and sufﬁcient conditions’ must be as numerous as the unknowns. Irving Fisher (1894) This chapter establishes the book's analytical framework, reviewing the theoretical underpinnings of bimetallic systems. Two important questions must be settled. The ﬁrst, which was debated at a very early stage, concerns the viability of a monetary system in which the ratio between two means of payment is deﬁned by law. It may be stated as follows: is there a contradiction between the operation of a market economy and the attempt to deﬁne legally the ratio between gold and silver? The second question (which relates to more modern debates on the stability of competing currency systems, as exempliﬁed by bimetallism) raises the coordination problem: how to be sure that speculation on gold/silver exchange rates will be in conformity with the legal ratio? The answers to these questions form the basis of the theory of bimetallism and help to identify issues of key importance for understanding the workings of the system. Some of the results set out here were developed in earlier work on the double standard—notably by Walras (1881), Fisher (1894), Chen (1972), Niehans (1978), and Barro (1979). They share a certain kinship with the modern theory of competing currencies, which deals with the setting of exchange rates between currencies circulating simultaneously in a given economy (Kareken and Wallace 1981; Weil 1991; Woodford 1991). This last body of study poses most clearly the problem of coordination, overlooked by traditional theoreticians. The bimetallic systems’ faculty for coordinating economic behaviour around the legal ratio has not to our knowledge been discussed before.

16

BIMETALLISM IN THEORY

1. IS BIMETALLISM POSSIBLE? Partial equilibrium reasonings The logical possibility of the double standard stands to reason—even if justifying it requires a careful discussion. We shall therefore begin by a simple statement of the problem, before going on to a more formal treatment. Under a bimetallic ‘constitution’, gold and silver exercise a twin function. They can be sent to the minting shops, made into coin, and used for the purposes of monetary circulation. Or they can be sold as a commodity for adornment or industrial use.31 The importance of these latter uses should not be underestimated. Table 1.1 shows that the industrial use of gold and silver was roughly equivalent, in the long run, to their monetary use.32 The twin function of bullion has proved to be a serious theoretical stumbling-block. Some economists have stressed the industrial applications. In line with a seemingly common sense understanding of the meaning of ‘commodity money’, they have considered that gold and silver were used as currency because they were consumed as a commodity. Giffen, for example, asserted in 1892 that ‘The precious metals, it is admitted on all sides, have extensive nonmonetary use. They are merchandises as well as money. But few people perhaps realize that this nonmonetary use is preponderant over the monetary use itself.’33 In the footsteps of Locke, the ‘classics’ (John Stuart Mill in England, or Jean-Baptiste Say in France) for the most part held that the exchange ratio between the two metals was, as a result, governed by their relative value as commodities. In this view, their price is set by supply and demand and thus varies constantly. The market continually revises the commercial ratio between the two metals, making it impossible to pass legislation on their rate of exchange. The legal ratio which the government tries to impose through bimetallic legislation conﬂicts with the requirements of ‘mother nature’ and is therefore a ‘tax’ or ‘levy’. According to Jean-Baptiste Say, the authorities should have abandoned the ‘foolish pretension’ of ruling the relative value of gold and silver in advance by ‘arbitrarily putting a name on it’.34 Any attempt to ﬁx the relative values of the two metals is doomed from the start. A ratio set higher or lower than what the market wants would trigger the melting down of undervalued coins. The legal ratio is hence an unstable rule, a ‘knife edge’. The logic here seems impeccable but second thoughts quickly arise when the reasoning is seen to be in fact a partial equilibrium argument. The equilibrium exchange ratio between gold and silver is provided exogenously by comparing supply of and demand

31

The statistician Soetbeer, in his classic statistical compendium (1889), listed some of these uses: watchcases, watch-chains, nibs, spectacle frames, chemicals, clockmaking, jewellery, etc.

32

The long periods during which silver minting in Europe (see ‘coined’ column) was dormant should not be misinterpreted. They correspond with years when the relative abundance of gold led to its being the metal of choice for coinage. Moreover, Mulhall's ﬁgures (given here primarily as an indication) ignore the large amount of silver minting that took place in Silver Standard European countries (such as Germany and Holland). The relevant basis for comparison is stocks, not ﬂows; the important ﬁgures are the totals in Table 1.1.

33

Giffen (1892: 56).

34

Jean-Baptiste Say (1826: 5th edn., Vol. II, 110).

17

THE LOGIC OF ARBITRAGE

Table 1.1 ‘Monetary’ and ‘non-monetary’ demand for bullion Gold (tonnes) Silver (tonnes) Coined 1831–40 50 1841–50 350 1851–60 1,633 1861–70 1,008 1871–80 849 TOTAL 3,890

Industry 180 200 280 570 840 2,070

Asia 10 28 100 300 120 558

Coined 2,700 4,800 0 0 1,200 8,700

Industry 2,000 2,200 2,700 3,100 4,500 14,500

Asia 2,200 2,400 11,300 12,300 10,800 39,000

Source: Mulhall (1903). These ﬁgures do not distinguish between Asia's monetary and non-monetary uses. Coin-minting statistics from India, the main metal consumer of the time, do, however, provide an inkling. The ﬁgures given in Reserve Bank of India (1954) suggest that two-thirds of Asia's silver consumption was earmarked for monetary use in India. 5,000 tonnes of silver were minted there from 1836 to 1850, 7,000 tonnes from 1851 to 1860, 8,000 tonnes from 1861 to 1870, and 6,500 tonnes from 1871 to 1880. See also Chapter 7.

for the two metals considered as commodities. This ratio then deﬁnes the relative value of the two metals considered as currencies. For this to be true, an important assumption whose implications were generally overlooked by the classics and still are today by many modern economists (Garber 1986) has to be made: demand for monetary use should not affect the metals’ availability as commodities. This assumption is a bad one, given the important role of coin-minting and monetary uses in total bullion consumption. It is an error, in other words, to posit that the relative prices of gold and silver viewed as commodities are exogeneous. The logical ﬂaw in this conventional reasoning is that, like any partial equilibrium argument, it can easily be reversed. The credit goes to Wolowski (1870) for ﬁrst realizing this when he held that the legal ratio was, on the contrary, the exogenous factor that governed the relative prices of commodity gold and silver. For a given legal ratio, equilibrium was achieved through the reallocation of gold and silver monetary balances, which readjusted to satisfy the precious metal needs of industry and the jewel trade. This argument formed the kernel of what is called ‘scientiﬁc bimetallism’, later put into systematic (i.e. mathematical) form by Walras some years before Fisher expounded his famous ‘reservoir model’ of bimetallism (Walras 1881; Fisher 1894). For the economists of the time, scientiﬁc bimetallism was initially shocking because it seemed to assert the primacy of the law over the market in determining a price (the bimetallic ratio), contrary to laissez faire doctrine. Wolowski also deﬁned himself as a free-trader,35

35

Wolowski's position needs to be seen in a broader perspective. During the 1850s and 1860s, the French liberal school split over the money question. The orthodox view, defended by Chevalier and Parieu, was that money was ﬁrst and foremost an item of merchandize. As such, it should be free from all government intervention. Consequently, the Bank of France's monopoly over issuing currency, and the attempt to ﬁx the gold–silver ratio were horrors that had to be stamped out. Wolowski viewed himself as a supporter of laissez-faire but argued along lines which suggest that he thought money was what later became known as a ‘public good’. According to him, intervention by the law was the ‘natural complement of free trade’. Wolowski, in his polemics over the currency issue monopoly or over bimetallism, was supported by a loyal pair of authors: Emile de Laveleye, a disciple of Saint-Simon, Professor of Political Economics at the University of Liège, and standard-bearer of bimetallism after 1873; and Léon Say, Jean-Baptiste's grandson, who later became Finance Minister. Chevalier and Parieu bitterly reproached the latter for ‘murdering’ his grandfather on the matter both of the monopoly (Plessis 1985b: 54) and bimetallism (Chapter 8).

18

BIMETALLISM IN THEORY

but he believed that the bimetallic law ﬁxing the legal ratio was a ‘natural complement’, a necessary adjunct, which enabled dealers to determine the relative price of the two metals. As more recent research has indeed shown, when two sorts of paper money are circulating within the same economy, setting their exchange rate is primarily a matter of convention, and thus of legislation, in line with Wolowski's intuition (Kareken and Wallace 1981). But does the same apply in the case of commodity money? We have two partial equilibrium arguments here that seem to contradict one another. They both derive from the same very broad principle: the exchange ratio between gold and silver as currencies must equal their relative prices as commodities; otherwise, arbitrage becomes possible. The debate seems to concern the direction in which the equality should be read. In fact, as will be seen, the solution to the contradiction requires a broader perspective, that of a general equilibrium. For this, we build a model which will reveal the assumptions underlying each theory. It will establish the broad validity of Wolowski's conclusions. In particular, we show that it is generally impossible to rely on the market to price the equilibrium exchange ratio between the two metals. Put informally, the reasoning goes as follows: the relative value of gold and silver cannot be deﬁned without a knowledge of, among other things, the monetary demand for each metal; and monetary demand depends on the expected purchasing power of the specie balances so acquired. But this purchasing power itself depends on the price of the two metals. Reliance on the market to price the gold–silver ratio results in a circular argument. As Fisher nicely observed, In the single case of money, there is no ﬁxed ratio of substitution…. We have here to deal, not with relative sweetening power, nor relative nourishing power, nor with any other capacity possessed by the metals independently of their prices. We have relative purchasing power. The user of money does not reckon a utility in the metal itself but in the commodities it will buy. He assigns deﬁnite utilities to the sugars or the wheats before he knows their prices, but he must ﬁrst inquire the relative circulating value of gold and silver before he can know at what ratio he himself prises them. To him the ratio of substitution is identically the price ratio, and therefore can have no inﬂuence in ﬁxing that ratio. The case of two forms of money is unique. They are substitutes without a ratio of substitution. (italics in the original) (p. 528)36 The rest of the chapter spells out the logic underlying this intuitive argument and deduces its consequences. Readers less interested in theory may limit themselves to a brief look at the last section where a simple example is developed.

36

Fisher (1894: 528).

THE LOGIC OF ARBITRAGE

19

2. A GENERAL EQUILIBRIUM MODEL We focus here on the stationary equilibria in an economy where gold and silver are used together as currency.37 We consider an exchange economy and assume that there exists a collection of m perishable goods, available in ﬁnite and constant supply at each period, in addition to an initial store of gold and silver, which are durables. Let p = (p1, p2,…, pm, pg, 1) be the price vector of the m goods, gold, and silver. We suppose without loss of generality, that the price of silver equals 1, so that pg is the exchange ratio between gold and silver. Let , Gi(p), and Si(p) be respectively the functions of excess demand by individual i for good j (j belongs to [1, m]), gold-as-commodity, and silver-as-commodity.38Mi(p) is the money demand expressed by individual i. Gold and silver being perfect substitutes for payments, the individual does not care whether he holds gold or silver coins, and thus Mi(p) is expressed in purchasing power units only. Lastly, let Mg(p), Ms(p) be respectively the aggregate quantities of gold and silver available for monetary use (i.e. the difference, for a given price vector, between total outstanding supplies of gold and silver bullion and aggregate individual non-monetary demands). We can now proceed to write the equations deﬁning a bimetallic equilibrium, that is, an equilibrium in which positive aggregate quantities of monetary gold and monetary silver are held. The system is then as follows: Equilibrium on the m goods, commodity-gold, and commodity-silver market:

Equilibrium on the currency market:

Positive amounts of monetary gold and silver held at equilibrium:

After substituting identities (1.1b) and (1.1c) in Equation (1.2) and eliminating one market (in line with Walras's Law, which reﬂects the fact that agents’ budget constraints

37

For the sake of simplicity, we adopt here the framework developed by Grandmont (1983).

38

Excess demand functions are deﬁned as being the difference between individual demand for metal-as-commodity and individual holdings of the same metal. Therefore, the sum of individual excess demand functions equals net aggregate money supply of the economy (with a minus sign).

20

BIMETALLISM IN THEORY

are always binding), the following system of equations obtains:

The fundamental property of bimetallic equilibria can then be stated. Proposition 1(Walras1881; Fisher1894) Bimetallic equilibria, if they exist, are indeterminate, that is to say, they do not ordinarily deﬁne a single equilibrium price vector. This conclusion follows naturally from Equations (1.4a) and (1.4b). If a bimetallic equilibrium exists, the constraints expressed in (1.4b) are veriﬁed by deﬁnition. Hence only the m equations represented by (1.4a) are left to determine m + 1 relative prices.39 Put otherwise, for a certain level of gold and silver supply, and for given preferences, there exists a priori a set of equilibrium price vectors consistent with (1.4a). The market is thus unable to determine a single equilibrium and, more particularly, a single relative price between gold and silver.40 There is no built-in contradiction, therefore, between the operation of a market economy and the attempt, by government, to legislate the gold–silver ratio. The legal ratio is not necessarily a redundant constraint, super-imposed on a well-deﬁned market equilibrium. On the contrary, it ﬁlls a gap. The setting of a legal ratio by the monetary authorities is not only quite possible, it is necessary. In the light of the foregoing, it is possible to interpret the two partial equilibrium arguments referred to earlier. They can be seen to rest on opposite implicit assumptions as to the relative importance of the monetary and commodity functions of gold and silver. Let us ﬁrst suppose that the monetary use of gold and silver is negligible as compared with their non-monetary uses.41 At the extreme, our economy acts as a pure exchange, ‘barter’, economy. In this case, equilibrium prices are fully deﬁned by the m + 1 equations as shown below (Equations 1.5a, 1.5b). In general, a single exchange ratio between gold and silver is thereby obtained by the market, and there is no place for government action. This is the position of the traditional doctrine, which presumes

39

A contrario, if either of the two constraints were binding (both cannot be binding simultaneously, for that would mean that the economy has a zero money demand, which is impossible), there would be m + 1 equations, certainly, but the economy would be in a de facto monometallic regime. Hence a true bimetallic equilibrium, if it exists at all, is indeterminate.

40

The problem of existence is here ignored. The numerous speciﬁcations found in the literature (Chen 1972; Niehans 1978, or the model worked out below) show that in general such an equilibrium can be computed.

41

More strictly, for any price vector, aggregate gold (respectively, silver) as-money demand is negligible compared with aggregate gold (respectively, silver) as-commodity demand.

THE LOGIC OF ARBITRAGE

21

that gold and silver are principally commodities.

Now let us consider the symmetrically opposite case, where demand for commodity—gold and silver—is negligible compared with their monetary use. At the extreme, the two metals are demanded solely as currency, and we arrive at the situation examined by Kareken and Wallace (1981). Gold and silver coins are simple ‘tokens’ with no intrinsic use apart from their monetary rôle and their exchange ratio is purely a matter of convention. We have m equations, m + 1 relative prices, and no effective constraint (gold and silver money balances are then by deﬁnition equal to the two metals’ respective outstanding stocks, and are therefore always positive). In such a case, any gold–silver ratio can be an equilibrium exchange rate. Formally:

In view of the actual importance of both the monetary and goods functions documented earlier (Table 1.1), bimetallism should be regarded as a blend of the two extreme cases mentioned above. Since the market by itself is ordinarily incapable of ﬁxing a single equilibrium exchange ratio between the two metals, the government is obliged to institute some sort of coordination mechanism. The government is not, however, free to set any legal ratio it likes; it must set one that lies within a given range. This is because the chosen ratio must be such that the economy is prevented from shunning the use of either metal as money. Too low a price for, say, silver might induce agents to increase their demand for commodity silver to the point where this metal disappears from the circulation. But how low is low, and how high is high? This leads to the all-important question ﬁrst studied by Walras: where do permissible bimetallic ratios lie?

3. LOCATING BIMETALLIC EQUILIBRIA: WALRAS'S CONJECTURE Walras, in order to pin down the set of possible legal ratios, suggested locating them with reference to the equilibrium ratios that would obtain in a Gold Standard and a Silver Standard regime respectively. These regimes, where a single metal is used as currency, each deﬁne a single equilibrium price between gold and silver.42 Walras guessed that the set of admissible legal ratios would necessarily fall between the equilibrium price

42

As may be veriﬁed by rewriting the bimetallic equilibria on the assumption that aggregate monetary demand for one of the two metals equals zero.

22

BIMETALLISM IN THEORY

that would apply if the economy had adopted a Gold Standard and that which would apply on a Silver Standard. The idea behind this conjecture is simple. In a Gold Standard system, only gold is used as money. The amount of gold available for consumption is therefore smaller than it would be under a bimetallic regime, where some silver is used for making payments, thus saving on gold. If the economy operates a Gold Standard there will therefore be a greater scarcity of gold than under bimetallism. Similarly, and for the same reasons, silver is scarcer in a Silver Standard than in a bimetallic one. Bimetallic equilibria, if they exist, must hence be associated with gold–silver ratios lying within a range bounded by the equilibrium exchange ratios obtaining respectively under a Gold Standard and a Silver Standard regime. Proposition 2(Walras1881; Fisher1894) It is assumed that (a) the economy deﬁned above allows a Gold Standard equilibrium and a Silver Standard equilibrium; (b) aggregate demand for commodity-gold (or, commodity-silver) is a decreasing (or, increasing) function of pg the gold–silver exchange ratio. Then, where pg(G), pg(S), and pg(B) represent the gold–silver equilibrium exchange ratio under the Gold Standard, Silver Standard, and bimetallic standard respectively: pg(G) ≥ pg(B) ≥ pg(S). This proposition follows from assumption (b).43 Since, in a Gold Standard equilibrium, there is less gold and more silver available for consumption than in a Silver Standard equilibrium, pg(G) ≥ pg(S) (owing to the assumption of decreasing aggregate demand functions with respect to pg). Furthermore, pg(B) must lie between pg(S) and pg(G). If it did not, it would mean that the bimetallic equilibrium is using more gold or more silver as money than the monometallic systems, an impossibility because the allocation of resources would then be inefﬁcient. The problems stemming from a ‘bad’ choice of the legal ratio can be easily understood from the supposition of Walras. The classic example is the ‘mistake’ of Isaac Newton who, in 1717, set the ratio ‘too high’ and triggered the de facto apparition of the Gold Standard in Great Britain (Eichengreen and Flandreau 1997). Newton had, in other words, set the ratio above pg(G), whereas all the admissible ratios must lie between pg(S) and pg(G). Regardless of the equilibrium considered, silver had been undervalued with regard to Newton's ratio. At that price, no one was prepared to use silver for payment at the legal rate. Only gold was used, and the British economy found itself on the Gold Standard, associated with the equilibrium exchange ratio pg(G).44

43

The conditions under which Walras's conjecture is obtained are clearly akin to those on which the so-called ‘Law of Demand’ rests. Its microeconomic foundations therefore require assumptions similar to the famous Antonelli equations. Technical demonstration of Walras's conjecture depends on being able to rule out problems of ‘reswitching’; a monotonic relation must be shown to exist between the equilibrium prices of gold and silver and the proportions of gold to silver in circulation, ensuring that if bimetallism is abandoned when relative gold and silver resources rise above a certain threshold, it does not return at a higher level.

44

Another possible (but not fundamentally different) reading of this episode consists in stressing the interaction among different national laws. It is possible, by slightly modifying the model in the next section, to show that, if two economies have two distinct bimetallic ratios and no transaction costs, only one at most of these ratios can prevail as equilibrium price. (If this were not so, arbitrage would be possible.) It can also be proved that the lowest ratio prevails in situations where silver is relatively scarcer and the highest ratio prevails in situations where gold is relatively scarcer. In the end, we obtain a series of ‘bimetallic steps’ which ascend as silver becomes relatively more abundant.

THE LOGIC OF ARBITRAGE

23

Of course, since governments had no easy way of obtaining information for deciding the range within which the legal ratio should lie (Irving Fisher remarked on the ‘extreme difﬁculty’ of knowing the range in advance), the success of bimetallic legislation was largely a matter of trial and luck. This possibly explains the lengthy debates that always preluded the setting of a suitable ratio. It may also account for the confusion that has surrounded controversies on bimetallism. Needs and resources, that is, supply and demand or ‘the market’ do in a sense impose constraints on bimetallism by inﬂuencing the range of acceptable ratios. Thus while the ‘authorities’ ﬁx the ratio, the ‘market’ ﬁxes the bimetallic boundaries, thereby validating or not the lawmakers’ decision.

4. COORDINATION The previous section showed that the theoretical motivation for a legal ratio lies in the indeterminacy of bimetallic equilibria. The interpretation needs, however, to be further clariﬁed. So far, we have not discussed the problem of coordination. Even if the legal ratio is correctly ﬁxed at a level corresponding with a bimetallic equilibrium, we need to understand why agents align their forecasts on this exogenous value instead of coordinating on any other possible ratio. The problem may be stated as follows: ‘If I believe that everyone else thinks that the equilibrium price ratio will be different from the legal ratio, I should forget the legal ratio and base my calculations on what I believe the market thinks. It is only on that basis that my specie holdings will be accepted.’ What then was the mechanism which induced compliance with the ofﬁcial ratio? In resolving the problem of coordination, it is important to remember the nature of contracts under bimetallic constitutions: as already noted in the Introduction, for each franc owed, a bimetallic contract offers the debtor the choice of paying his nominal debt with coins containing either 4.5 g of pure silver or 0.29032258 g of pure gold to the franc.45 When agents assess their money demand, they hence compare the ex ante equilibrium exchange ratio with the legal one . Obviously, if , no one would want to pay with gold (silver being cheaper), while, if , no one would want to pay with silver (it being a better deal to pay with gold). Bimetallic constitutions thus entail the following rational attitudes: if , then , and, if , then . The following proposition may then be formulated: Proposition 3(based on the same assumptions as Proposition 2) Suppose that authorities have ﬁxed a legal ratio for which a single bimetallic equilibrium exists. This equilibrium is the only one for which the ex ante and ex post ratio coïncide.

45

The law is assumed to provide a system of penalties to ensure that agents do not deliver less of either metal than the ofﬁcial quantity. It is obvious, too, that they do not have any valid reason for giving more than the law requires them to.

24

BIMETALLISM IN THEORY

To prove this proposition, let us assume that the representative agent predicts a ratio greater than . This being so, all will want to pay with silver. The economy will then be on a Silver Standard associated with an exchange ratio lower than (in accordance with Proposition 2), contradicting the initial assumption. A symmetrical argument holds when agents predict a ratio smaller than . It follows that the only equilibrium where the predicted and the actual exchange ratios coincide occurs when is equal to . Agents then have no preference between holding gold or holding silver.46 This ﬁnding may be interpreted as follows. The choice of paying with the more advantageous type of coin automatically produces an extra demand for the metal whose depreciation is predicted. This feeds back on its value, which is sustained by competition among agents all seeking the cheapest way to settle their debts. In equilibrium, stronger demand for the depreciated metal has eliminated the initial depreciation. Bimetallism thus bases coordination around the legal ratio on private interest, through the ‘option’ which is at the heart of bimetallic contracts. The government does no more than propose a point of coordination, leaving it to the agents to balance the market. Bimetallic constitutions, in other words, produce stabilization of the commercial ratio endogenously, by organizing competition among agents who buy the cheapest metal until equilibrium is restored. In the ﬁnal analysis, it is the market which operates bimetallic systems. This is a key conclusion whose implications will be carefully spelt out throughout this book.47

5. A SIMPLE APPLICATION This section considers a simple linear application of the model studied above. Its straightforward form provides an explicit and simple solution that will be put to work in Chapters 7 and 8 when we discuss the macroeconomics of bimetallism. In this example, we consider an economy in which gold, silver, and one single perishable good are traded. The model may be thought of, alternatively and without loss of generality, as representing either a closed bimetallic economy, or a world where one economy is on a bimetallic standard while others are on either gold or silver. In the former case, the

46

It should be noted that our concept of stationary equilibrium leaves out the possibility of speculative bubbles on the price of gold or silver. In principle, speculative demand (as discussed by Salant and Henderson 1976) for the precious metals would have to be included, alongside monetary and non-monetary demand. This eventuality can, however, be ruled out with the following argument. Assume that our representative agent plans to unload his speculative stocks before a certain ﬁnite date T. On that date, the price of the previously stocked metal will fall, killing further speculative appetite. Even in a more general time frame, our account therefore remains valid.

47

It is interesting to note that this property was in most cases ignored by the authors who, after Locke and Jevons, insisted on the option aspect of bimetallic contracts. Garber (1986) provides an illustration of what we believe is an error. His model of bimetallic contract price-setting leaves out of account the feedback operating from the metals’ value to the kind of metal demanded. Among ‘knife edgers’, only J.-B. Say (despite being a foe of legal ratios) appears to have been aware of this mechanism. He remarked that when silver tended to depreciate, it was preferred as the metal of payment, a mechanism which ‘ampliﬁes demand for this metal’, and tends to stabilize its price. Say does not seem, however, to have pursued his remark to its logical conclusion (Say 1832: Vol. 2, 1–69).

THE LOGIC OF ARBITRAGE

25

legal ratio sets the domestic exchange rate between gold and silver. In the latter case the legal ratio sets the exchange rate between gold and silver for the world at large.48 By virtue of Walras's Law, general equilibrium in this good-plus-money economy is entirely described by three markets: the money market, that of commodity-gold, and that of commodity-silver. Aggregate demands for non-monetary gold (Gn) and non-monetary silver (Sn) are given by (Y being real income, μg and μs positive constants, while P, Pg, and 1 are the general price level, the price of gold, and the price of silver, respectively):

Aggregate money demand is given by (k being a positive constant, while Gm (alternatively Sm) represents the aggregate stock of monetary gold (monetary silver)):49

The model is closed by equating bullion supply and demand (G and S representing the total outstanding stocks of gold and silver):

The model is resolved in Fig. 1.1 which shows the equilibrium (log) exchange ratio between the two precious metals as a function of relative gold and silver resources R (R = log(S/G)). The line GG′ corresponds to Gold Standard equilibria (Sm = 0). The line SS′ represents Silver Standard equilibria (Gm = 0). For any given level of relative resources (R0), the Gold (or Silver) Standard equilibrium lies at point G0 (or S0). Consistently with what we have seen, the equilibrium commercial ratio is higher, for a given level of resources, under the Gold Standard than under the Silver Standard. The segment [S0, G0] corresponds to the continuum of bimetallic equilibria compatible with R0. The main advantage of this speciﬁcation is that it gives us an unambiguous relation between the structure of gold and silver resources, the composition of gold circulation, and the equilibrium prices. This relation is represented by the thick line. Let us imagine starting from a relative scarcity of silver resources (R smaller than RMIN), whose proportion gradually rises. Suppose also that the authorities have set the legal ratio at . To begin with, silver is too scarce (too scarce, that is, for a bimetallic equilibrium corresponding to to exist), and the economy operates on a de facto Gold Standard. The increase in silver production tends, by making silver more plentiful, to raise the commercial ratio (i.e. to depreciate silver) until it joins the legal ratio.

48

Chapter 7 will use this model in its second possible interpretation, that is, as a description of a world comprising a number of open economies on disparate monetary standards. It then sufﬁces to reinterpret non-monetary demand in the bimetallic country of the closed bimetallic economy case as monetary demand in the open economies on disparate standards case. The equivalence between these interpretations helps us to see how the pre-1873 system corresponded to the international bimetallism proposition devised after 1873.

49

This formula may be interpreted in many different ways: as an application of the quantity theory, of the Cambridge k, or, more generally, of any schedule that postulates a relation of long-term proportionality between money demand and nominal income.

26

BIMETALLISM IN THEORY

Fig. 1.1.The bimetallic equilibria and the economy's resources

From then on, the monetary regime switches to a de facto bimetallic standard. The equilibrium ratio coincides with the legal ratio, and positive quantities of gold and silver are in circulation. The new inﬂows of silver are absorbed into people's specie holdings and serve to release greater amounts of gold for non-monetary uses. Little by little, the proportion of gold in circulation goes down, whereas that of silver goes up. This process may be interpreted according to Gresham's Law: the ‘bad’ money (namely, silver, the one whose relative availability grows) chases out the ‘good’ (namely, gold). It is this substitution which stabilizes the exchange ratio between the two metals. In equilibrium, there is strictly speaking no ‘good’ or ‘bad’ money. Gresham's Law is here interpreted as the natural consequence of a ﬁxed price equilibrium, which is to say, an adjustment of quantities. It would therefore be more accurate to say that the more plentiful money takes the place of the scarcer money or, again, that equilibrium holdings intensiﬁes in the metal that becomes more available.50 Let us keep moving along the thick line. When silver resources become superabundant and gold has gone completely out of circulation (R greater than RMAX), the regime changes again. The economy is now on a de facto Silver Standard. From this point on, any new addition to the silver stock will produce a further silver depreciation. The more abundant silver (which is now the staple of circulation) becomes, the more its value decreases with respect to gold.

50

For an alternative interpretation of Gresham's Law, see Rolnick and Weber (1986). The article by Selgin (1996) challenges the views of Rolnick and Weber in a fashion that is closely related to the ideas developed in this chapter.

THE LOGIC OF ARBITRAGE

27

6. CONCLUSION Three main conclusions stand out at the end of this chapter. First, bimetallism is possible; the authorities have the opportunity (and the duty?) to legislate the relative value of the two precious metals. Second, once the legal ratio has been set, its stabilization relies on the market and the rational behaviour of agents, who adjust their specie stocks in line with gold and silver demand and supply, so as to obtain purchasing power at the lowest cost. The double standard is, from this point of view, a minimalist monetary constitution, in the sense that it leans very little on ‘ofﬁcial’ monetary institutions. Their role boils down to deﬁning the legal ratio, and guaranteeing that it will not subsequently vary. Third, any bimetallic constitution in effect allows for three effective regimes. Their advent depends on the relative conﬁguration of bullion availability, and the respective strength of monetary and industrial needs. Since the ratio achieves stability under only one of the three possible regimes (the one where gold and silver are jointly in circulation), it is important, in examining the history of the double standard, to determine which one of these regimes predominated in which period. This task is addressed in the next chapter.

2 Gold–Silver Points: Domestic Arbitrages and the Bimetallic System Silver prices in London, from the beginning of the century until 1872, were nothing other than the indication of a constant value ratio of gold to silver. It is mathematically certain that the variations in silver prices in London until 1873, that is, deviations below or above the average price of 60 7/8 pence, came from incidental expenses only. Ernest Seyd, quoted by Soetbeer (1889: 26) In an ‘ideal’ bimetallic economy, where arbitrages are automatic, it is not possible for the commercial ratio between gold and silver to depart from the legal ratio, as long as sufﬁcient amounts of gold and silver monies remain jointly in circulation. If this were not so—if, for example, the gold–silver price ratio showed signs of climbing above 15.5 on the bullion market, holders of gold coins would be wise to have them melted and sell the proceeds. This operation would allow them to buy silver in bars and have it minted. They would ﬁnd themselves with identical nominal money balances (the same purchasing power) and would have made an arbitrage proﬁt. Obviously, every dealer can reason in the same way. The result is tough competition to sell metal whose value is rising and buy metal whose value is falling. This competition continues until arbitrage proﬁts are cancelled out, when the commercial ratio equals the legal ratio. The equilibrium ratio cannot therefore differ from the legal ratio. This ostensibly simple logic rests nevertheless on an important assumption. Arbitrage must be possible, that is, there must be enough of the appreciating metal in circulation. If the gold–silver commercial ratio goes above or below 15.5, but not a single gold or silver coin remains in circulation, arbitrage cannot work and its stabilizing effects will not be felt. In this case, the rise of the price ratio above the legal ratio may well go unchecked. The commercial ratio has therefore much to teach. For lack of a time-machine that would let us check what coins actually circulated then, the study of the commercial ratio's historical record is an indirect way of determining whether effective bimetallism prevailed in those years; that is, whether a concurrent circulation of gold and silver truly existed in the periods under study. This matter is vital. It is the premise for the whole empirical discussion of bimetallism. The previous chapter showed that a bimetallic constitution can be broken down into three distinct regimes: effective Gold Standard where the economy uses gold exclusively for circulation; effective Silver Standard where the economy uses silver

THE LOGIC OF ARBITRAGE

29

exclusively; effective bimetallism where both metals are in circulation. From an economic standpoint, however, the three regimes are ruled by different ‘laws’. In each case, the price ratio between gold and silver is formed on distinct bases; equilibrium equations change; and so does the interpretation of the mechanisms at work.51 Whence the importance of a precise identiﬁcation of the underlying regime. The method followed here consists in working with the gold–silver price ratio, about which there is good-quality information, to determine the regime prevailing in each period concerned. The commercial ratio is used here as the basis for a test for accepting or rejecting the hypothesis that effective bimetallism prevails or not at a given point in time. If arbitrage is possible, the price ratio is ﬁxed at, or at least close to, the legal ratio: the situation is then one of ‘effective bimetallism’.52 A commercial ratio away above 15.5 reveals an effective Silver Standard situation, while a ratio far below the legal ratio points to an effective Gold Standard one. Of course, it remains to be decided how ‘close’ is ‘close’ and how ‘far’ is ‘far’. The answer to this problem requires building a yardstick for measuring the amplitude of variations in the commercial ratio. This chapter proposes a method for dealing with that question.

1. QUESTIONS OF METHOD: A TEST IN THE SPIRIT OF O. MORGENSTERN There can be no doubt that the commercial ratio, unlike the 15.5 legal ratio set in 1803, did ﬂuctuate somewhat over the course of the century. It went through long periods where it hovered slightly above (1821–50 and 1867–73) or slightly below (1851–66) the legal ratio. Contemporary observers and scholars alike often talk of appreciation or depreciation. These terms are not strictly speaking correct. To see why, consider our earlier example of a rise in gold price arbitraged by those who melt gold coins and mint silver to restore equilibrium. Suppose now that melting and moneyminting entailed a certain amount of spending that may be called ‘arbitrage expenses’. For as long as appreciation in the gold price is lower than those expenses, nobody will want to make a loss swapping gold for silver. In this case, the commercial ratio stabilizes, not exactly at the legal ratio, but within a band that includes the legal ratio and whose outer bounds reﬂect

51

An effective monometallic regime is one of ﬂexible exchange rates between gold and silver, whereas in an effective bimetallic regime the exchange rate is ﬁxed. It follows that, in de facto monometallism, variations in the available quantity of either metal will have a price effect (adjustment of exchange rates to the new market conditions), while in the bimetallic regime, the effect is a quantity adjustment: the increasingly available metal will swell its share in circulation. Where transition from one regime to the other is frequent, the inﬂuence of expectations concerning change in the effective standard must be borne in mind. They lead to switching from one standard to the other earlier than in a situation where such expectations do not exist, owing to the existence of speculative balances—the classic result of speculative attack theory (Salant and Henderson 1978). Oppers (2000) provides a stochastic version of the Walras model which has this property. See Flandreau (2002) for a discussion of these matters.

52

In the static model of the previous chapter, identity between the commercial and the legal ratio is a necessary and sufﬁcient condition for deﬁning an effective bimetallic regime. This property may be generalized to a context of uncertainty, since a price ratio at least near the legal ratio is always a necessary condition for effective bimetallism.

30

GOLD-SILVER POINTS

arbitraging costs. (These bounds, obviously, have nothing to do with those discussed in the previous chapter.) So, as long as the relative prices of gold and silver stay within this ‘band’, there is no call to speak of appreciation or depreciation—there being no material advantage in substituting one metal for the other in specie balances. Only when the ratio strays outside the limits of the band can it be concluded that France's circulation was short of either metal. This supplies a straightforward yardstick for identifying the underlying regime: if, at a given point in time, the exchange ratio between gold and silver has not gone beyond arbitrage costs, it is a safe assumption that effective bimetallism prevailed. The gold–silver points can be easily worked out from the logic of bimetallic arbitrage.53 On the gold market, the price of an ingot cannot fall below the level at which it becomes more proﬁtable to buy it at its commodity price and have it minted. Likewise, the same ingot's value cannot rise above the level where it becomes more proﬁtable to melt down the coins and sell the metal as commodity. Let be the ﬁxed price in francs of a unit of gold as money and pg its (variable) price as commodity. Let cg be the cost of coining a unit of gold-as-commodity (cg includes the cost of minting, foregone interest loss due to manufacturing time, etc.) and mg the cost of transmuting a unit of gold-money into gold-as-commodity (mg includes foundry costs, the cost of assaying, etc.).54 This gives the following inequality ‘enclosing’ the price of gold-as-commodity:

Similarly, recalling that the ﬁxed price of a unit of monetary silver is equal to 1, and deﬁning cs the minting cost and ms the melting cost:

Merging Equations (2.1) and (2.2) gives the bounds within which the commercial ratio pg/ps should lie:

53

Available analyses of gold–silver points typically neglect the fact that they derive from the combination of the two distinct arbitrages described in the text.

54

This inequality is obviously not speciﬁc to the context of bimetallism; See, for example, Jevons (1868) on the mechanics of the gold standard:Thus if de facto 100 ounces of gold are taken to the mint every day, and 99 ounces of coin are received back in exchange, this would actually establish the fact that 99 ounces of coin have the same value, at the time and place in question, as 100 ounces of gold. Since the facilities of transit render the values of bullion and coin sensibly the same all over the country, it follows that as long as there is any demand for coin at the mint, the values of gold and coin are deﬁned by the mint ratio of exchange. The value of the coin, compared with bullion, cannot be raised above this rate without the mint being set to work to restore equilibrium. On the other hand, the value of coin cannot fall unless there is already a superabundance of it, so that the mint is stopped working. In this case the value of coin may undoubtedly fall more or less …. So soon as the comparative values altered 1 per cent it would be proﬁtable to make the opposite exchange by melting the coin into bullion.

THE LOGIC OF ARBITRAGE

31

Since is the legal ratio (15.5), all that is needed is to normalize the last relation in order to express it as variations around the legal ratio (Δ = (pg/ps-15.5)/15.5), giving:

This is the formula for what Friedman suggested calling the ‘gold–silver points’, by analogy with the ‘gold points’ which measure the cost of delivering gold among the major ﬁnancial markets and so deﬁne the range within which the exchange rates between Gold Standard countries must remain to prevent arbitrage (see Morgenstern 1959, footnote 6, and next chapter). If the commercial ratio's deviation from the legal ratio goes beyond the upper boundary, arbitrage is possible. It consists in selling gold coin as commodity (cost mg) then coining silver (cost cs). The point where gold is melted and silver is minted is thus represented by cs + mg. Conversely, if the lower boundary is crossed, the opposite arbitrage happens: silver-money is melted (cost ms) and gold is minted (cost cg). The point where silver is melted and gold is minted is cg + ms.55 Equation (2.4) sketches the outlines of a simple programme: estimate arbitrage costs and compare them with variations in the commercial ratio. If these stay within the bandwidth, that is, if there are no ‘violations’ (as Morgenstern called this in the context of gold points analysis), the hypothesis of effective bimetallism may be accepted. If, on the contrary, they move outside the band, the hypothesis may be rejected. Of course, the series worked with here are only estimates: it is the general trend that matters, more than individual observations.56 Working out this type of test requires identifying both the relevant bullion market and the type of arbitrage that is being performed in relation to that market at each given point in time. Precious metals were being quoted in London, Paris, or Hamburg, and

55

The reason why it is better to work with Equation (2.4) rather than Equations (2.1) and (2.2) on their own is that the speciﬁc arbitrages for each metal must take into account the opportunity cost of parting with metal holdings. But this cost depends on what alternative means of payment are available. For example, an agent who parts with stocked silver that would have enabled him to buy some good must ask himself whether he can use some other means of payment. Until the 1850s, banknotes were hardly ever used in a number of places (as appeared in the Enquête Monétaire of 1857 and the declarations by James de Rothschild in 1870), so that the opportunity cost (or ‘liquidity premium’)—which thus varied according to region—of parting with a particular specie balance is difﬁcult to assess. The complete arbitrage described in Equation (2.4) consists in substituting one metal for another and so leaves the dealer with the same holdings as the ones he had to begin with. This obviates the problem.

56

The scholarly literature on ‘gold points’ was pioneered by Morgens`tern (1959) and then developed by Clark (1984) and Ofﬁcer (1986, 1996) among others. It rests on comparing variations in exchange rates between two given market-places with the cost of transporting gold from one market to another (the gold points). Morgenstern, in his landmark study, invented the concept of ‘gold point violation’. If the markets are ‘efﬁcient’ (if arbitrage is automatic), it may be expected that variations in exchange rates always lie within the gold points. Conversely, numerous violations would be an indication of market inefﬁciency. By analogy, we see that our examination of the commercial ratio between gold and silver is really a test of two assumptions at once. A violation of gold–silver points could result, as we have seen, from the depletion of one of the two metals in the money supply. Or, as in Morgenstern's approach, it could result from inefﬁciencies in bimetallic arbitraging, with dealers neglecting to seize proﬁt opportunities. In that case, poor market management would be to blame. Obviously, what concerns us most is the determination of the underlying regime.

32

GOLD-SILVER POINTS

many other centres. Thus, an estimation of arbitrage costs depends on the particular transaction that is considered, since certain costs (the most obvious one being the cost of transport) vary according to where the arbitrage occurs. The most serious modern attempt to evaluate the cost of bimetallic arbitrages is due to Friedman (1990a).57 Looking upon the operation from a London standpoint, Friedman proposed gold–silver points equal to 15.3 and 15.89 respectively.58 Comparing these values to average commercial exchange ratios between gold and silver in London over the period 1850–70, one concludes that gold–silver point ‘violations’ were so rare as to be ignored and that, in consequence, the period 1850–70 had an effective bimetallic regime (see Fig. 2.1(a)).59 Another little noticed but cardinal contribution to this subject is that of Ernest Seyd (1868).60 This book established Seyd, who was a bullion broker, extensive traveller, and author of numerous works on economics, ﬁnance, and mineralogy, as a leading authority in the City.61 A few years later (from 15 September 1877, to be precise, when The Economist began printing them each week next to the exchange rates), his gold-points estimates became the international benchmark. These were the numbers on which Morgenstern (1959) would rely. With such a career pedigree, Seyd's estimates of gold–silver points deserve some respect. Seyd was an expert who had access to information which is largely lost to modern scholars. Indeed, the principal difﬁculty in gauging the costs connected with bimetallic arbitrages stems from having to rely on information which is necessarily more fragmentary than what was then available to the professional arbitrageurs. Bullion dealers and bullion brokers had a detailed knowledge of the peculiarities of the different markets. Indeed, deciphering arbitrage riddles was

57

Other, more loosely reasoned attempts are reviewed in Flandreau (1997a).

58

Unfortunately, the method followed by Friedman is not totally explicit, making it difﬁcult to discuss it.

59

Angela Redish, in an earlier draft of her paper on bimetallism in France (1995), reached an opposite conclusion on the basis of gold–silver points calculated at 15.42 and 15.69, respectively, over the same period. These estimates, however, were removed from the published version.

60

Ernest Seyd (1868), Bullion and Foreign Exchanges, Theoretically and Practically Considered, Followed by a Defence of the Double Valuation. London: Efﬁngham Wilson.

61

Seyd, when questioned in the Enquête Monétaire of 1870, said he was a German citizen who had lived in France, the United States, and Great Britain, where he had settled in the early 1850s. In the tradition of men like Ricardo, Jourdan, or Goschen, Seyd was a broker who fancied himself as a political economist. Bullion and Foreign Exchanges was indeed hailed as a contribution to political economics by The Economist (23 May 1868: 563). The journal merely regretted that the author was ﬁghting for a ‘lost cause’—the defence of bimetallism:In a very modest preface, the author explains the object of his book. It is not a treatise in the theory of exchanges, nor a manual of exchanges, but a combination of the two, with a mass of information added regarding the actual practices by which foreign exchanges are conducted …. The information is apparently so detailed and so clearly given that the business of a bullion dealer or a cambist might be learned from the book …. To bankers, to general merchants who have to deal more or less frequently with exchanges, and to students of political economy, anxious to know exactly a certain class of facts with which his science deals, the work will be invaluable …. In other chapters …, he defends a “double standard” and does so very ably, bringing to bear an extensive knowledge of facts, which were worth bringing together, although the cause in which he ﬁghts is not a very hopeful one.

Marx, for his part, derided in a note included in an early version of Das Kapital this ‘lover of gold and silver’ (see Marx 1968: 1689).

THE LOGIC OF ARBITRAGE

33

Fig. 2.1.The gold–silver points and the ratio in London according to (a) Friedman and (b) Ernest Seyd

Source: Table 2.1 and Statistical Annexes. the very essence of their trade, and the source of their proﬁts. Their estimates are themselves a good reference. Seyd, relying on his own experience and focusing on more recent years, put the point where silver was exported between 61 and 62¼ pence an ounce (i.e. from 15.15 to 15.45). The point where gold was exported lay between 60¼ and 60½ pence a standard ounce (corresponding to a ratio of 15.59 and 15.65, respectively). These numbers referred to the London market and therefore to shipments between England and France; they

34

GOLD-SILVER POINTS

Table 2.1. The gold–silver points and bimetallism 1850–70 according to Seyd and Friedman Seyd (1868) Friedman (1990a)

Upper bound 15.59–15.65 15.89

Lower bound 15.15–15.45 15.3

Effective bimetallism Accepts Accepts

Source: See text.

are thus indirect assessments of the gold–silver points during the 1860s.62 Seyd, as the opening quote of this chapter shows, felt that the commercial ratio in London was, not only from 1850 to 1870 but also right through the nineteenth century until 1872, clearly ‘the expression of a constant relation’ of 15.5: variations around this ratio reﬂected no more than arbitrage costs, what he called ‘incidental expenses’. It can readily be seen, by comparing variations in the commercial ratio in London with these bands (Fig. 2.1(b)), that this conclusion was empirically motivated. However, Seyd, certain as he was of his methods, did not leave us the details of his calculations, nor did he give any ﬁgures beyond the 1860s. It thus seems necessary, in order to gain an idea of the technology behind bullion arbitrage and improve our understanding of the logic of bimetallism, to reconstruct arbitrage operations from a detailed analysis of the economic and institutional structures within which they were conducted. As Ofﬁcer (1986) suggests, this type of exercise requires starting from ‘ﬁrst principles’. It seems natural in our case to concentrate on the Paris market. The direct connection between Paris and France's bimetallic circulation made the Paris market a most convenient arbitrage centre and thus an excellent place for observing how stabilization of the ratio was accomplished.

2. THE GEOGRAPHY OF ARBITRAGE Bimetallic arbitrage is the response of rational agents to disturbances (shocks) arising on the bullion market. It involves, among other things, collecting coins in circulation and bringing them to the market. But while the tradinghouses for dealing in gold and silver were centralized (in France, bullion was quoted daily on the Paris Bourse), the dealers’ actual monetary holdings were scattered over the country. Bimetallic arbitraging entailed interaction between the Paris market and those regional holdings. It therefore had an important spatial dimension. Bimetallic arbitrages, instead of carrying fairly uniform costs, involved expenses which increased with the distance between where

62

Seyd's valuations seem to have corresponded not so much to estimates based on ‘typical’ transactions as to what may be called ‘revealed arbitrage costs’. Seyd had observed that the price of silver in London could not rise above the point where it became proﬁtable to export it outside France (and replace it with gold) and could not fall below the level where it paid to ship it from England to France (p. 402): ‘At 60¼ to 60½ Pence per ounce it pays to be sent to France …. But when the demand for India arises, and when the stock in the market here is exhausted, the stores of silver on the Continent supply what is required, and silver returns to England at prices varying from 61 to 62½ Pence’.

THE LOGIC OF ARBITRAGE

35

specie was held and where it was negotiated. This spatial aspect in turn generated a measure of path dependency: arbitrage costs depended on the direction and intensity of the arbitrages that had been carried out during previous periods. This point may be illustrated by representing a bimetallic economy as a disk. Everywhere on the disk, payments can be made with either gold or silver. The bullion market is located at the centre of the disk, while the specie holdings are distributed uniformly over its whole surface. For any one individual, the cost of bimetallic arbitrage, having the silver coin melted and buying gold, is divided into two parts: the ﬁrst is a ﬁxed proportion of the amount on which the arbitrage is performed (α). This part comprises coinage fees, assays, etc. The second part (which corresponds to transportation costs broadly deﬁned) is a proportion that increases with the distance between the location of the agent and the bullion market at the centre of the disk (θh, where h is the distance). The thought experiment we conduct here consists in duplicating the effect of the ﬁnds in California and Australia, while assuming for simplicity that at the beginning, only silver is held in the economy. Our goal is thus to trace the impact of the arrival on the market of a series of gold ﬂows over successive periods. These ﬂows obviously lower gold prices and trigger arbitrages. At the start, the ‘marginal arbitrageur’ (the one best placed to arbitrage variations in the commercial ratio) is the one at the centre of the disk (h=0). He steps in as soon as the ratio looks like deviating from the legal rate by an amount greater than α. Once all agents for whom h=0 have depleted their silver holdings and are left with gold only, it is the turn of the agents just behind them (in terms of distance from the centre) to become marginal arbitrageus, and so on for as long as the ﬂow of gold needs to be mopped up. The economy empties out its silver and ﬁlls up with gold in concentric circles around the bullion market. While this is going on, the cost of arbitrage (the point where silver is melted and gold is minted) keeps rising since collecting the metal requires carriage further and further from the centre. In sum, the gold–silver points are both path and space dependent.63 Figures 2.2(a), (b), and (c) illustrate the mechanism at work, showing how silver gradually recedes to the outer regions of the economy as the gold ‘surfeit’ from new discoveries is gradually ‘digested’ by the bimetallic system. In Fig. 2.2(a), silver circulates throughout the economy. Gold arrives on the bullion market (centre of the disk). The silver circulating close by the bullion market is used for bimetallic arbitrage. In Fig. 2.2(b), as gold continues to arrive at the centre of the disk, bimetallic arbitrages require going further from the bullion market to collect the so-called silver écus. Arbitrage costs rise but most of the economy still uses silver. In Fig. 2.2(c), we see that silver has now departed from all the central regions; it circulates only in the outlying ones. Arbitrage costs rise with the extra distance that needs to be covered to ﬁnd the silver. At these new costs arbitrage still functions, however, and continues to keep the commercial ratio stable. This model, when applied to the actual situation of France in the 1850s and 1860s when the bimetallic system was faced with an inpour of gold from the California and Australia ﬁnds, gives out a number of predictions. Broadly speaking, a gradual

63

This model disregards the part played by inter-regional balances of payment, a subject which will be discussed in the next chapter.

36

GOLD-SILVER POINTS

Fig. 2.2.Regional arbitrage in a simple geographical model: (a) Before gold discovery, (b) Gold discoveries drive silver out from the centre, (c) Silver only left in outer boundaries

Source: See text. replacement of silver by gold may be forecast. More precisely, the substitution should display several marked geographical features, in line with what is known of France's economic geography. To begin with, it may be expected that silver holdings will ﬁrst run out where arbitrage is the least expensive. For example, silver held in Paris was immediately available for arbitraging at minimum cost. The costs became much higher the further one moved away from the capital. It cost more to deal from the provincial towns than from the Paris faubourgs, and more from the rural areas than from the provincial towns.64 Competition for buying gold and selling silver should logically ﬁrst affect Paris's circulation, then that of the provinces, then that of the rural countryside. It must be borne in mind that certain outlying locations (ports or borders) could, because they lay on the route taken by silver towards its ﬁnal destination, be well placed for bimetallic arbitrage. Silver Standard countries (in Asia and Eastern Europe) were the main purchasers of silver (see the following chapters), so that bullion bought in Paris on behalf of foreign bankers could be shipped proﬁtably from regions close by the export routes. Such regions could, in this sense, be economically ‘near’ the centre despite their geographical farness from it. As Seyd described it (Seyd 1868: 413): ‘Shipments of silver are frequently made from Paris and Marseilles to India and the East for account of English Indian Merchant Banks. The shipping from the port of Marseilles saves time, and is sometimes more proﬁtable than shipments via Southampton’. Available primary sources, as well as second-hand accounts of the period (Thuillier 1983; Plessis 1985b), fully bear out the predictions of our geographical model. The replacement of silver by gold began in Paris in the early 1850s. It was well under way by the end of 1853,65 and in 1854 gold had become the staple of Parisian circulation. During that time, silver continued to predominate in the rest of the country. This disparity between Paris and the rest of France is illustrated in the changing structure of the Bank of France's reserves (Fig. 2.3). The provincial branches clearly lag behind the capital as regards the increase in the proportion of gold.

64

Weber (1976: 216 ff.).

65

Indépendance Belge (2 December 1853): ‘Let me tell you about what is happening in Paris. Silver is vanishing, 5-franc coins are becoming scarce and gold is becoming common’. See also Thuillier (1983).

THE LOGIC OF ARBITRAGE

37

Fig. 2.3.Proportion of silver in the Banque de France's reserves: Paris and provincial branches

Source: Statistical Annexes. Substitution continued as gold kept pouring in. Various accounts show that in 1855 it had reached the Paris faubourgs and satellite towns. In 1857, a French government survey provided a snapshot of the country's monetary geography (Map 2.1). The Treasurers-General (Receveurs-Généraux, who were local representatives of the tax authorities) were questioned on the situation in their Département. The metallic landscape that emerged from the survey was quite contrasty: that year, gold predominated in the Seine basin, the North of France, and the big provincial cities with rail connections (such as Lyons). It was also abundant in the vicinity of ports (Nantes and Marseilles) and those Départements in the North and East of the country which bordered on then Silver Standard countries (Germany, Belgium, Switzerland).66 Conversely, it was reported that, in the rural areas or the more isolated towns (such as Clermont-Ferrand), no silver coins at all had disappeared. The Treasurers-General had never heard mention of arbitrage. Rather oddly, certain urban Départements accused the country districts of grabbing up silver and stashing it away. Silver, they claimed, was ‘going into hiding’ in the countryside. This was, however, an error of perception. The cities’ silver was not being hoarded under the peasants’ mattresses; it was being exported. Far from Paris, the rural areas’ silver, protected by higher arbitrage costs, continued to circulate.

66

We may note that Belgium and Switzerland, where French silver coins freely circulated, remained on a Silver Standard until the early 1860s, despite a certain penetration of French gold (see Willis 1901).

38

GOLD-SILVER POINTS

Map 2.1.Gold and silver circulation in France, 1857 enquiry (π is the proportion of silver)

Source: Enquête de 1868. The tide of gold on the Paris market kept rolling in, and the substitution gradually reached other regions. After 1860, gold accounted for the major part of the bullion held in the Banque de France branch reserves. It predominated in all the urban areas and had gained the upper hand in many rural localities. Finally, after 1865, the substitution levelled off. A new survey was conducted in 1868 (Map 2.2). It provided a second image of the make-up of circulation. The half of the country located to the North of an imaginary line running from Saint-Malo to Montpellier was using mostly gold. This area corresponded to the most economically and ﬁnancially developed, and so most integrated, part of the country: the part that was most sensitive to arbitrage. In the other half of the country, however, the one traditionally regarded as backward and for that reason largely virgin of banking networks, a substantial amount of silver was still being used. It made up more than 50 per cent of circulation in certain Départements of Brittany and the South-West, such as Finistère and Pyrénées-Atlantiques. The geography of gold-for-silver substitution—since it was determined by transaction costs, which themselves depended on economic progress—provides a photograph of regional degrees of development.

THE LOGIC OF ARBITRAGE

39

Map 2.2.Gold and silver circulation in France, 1868 enquiry (π is the proportion of silver)

Source: Enquête de 1868.

3. GOLD–SILVER POINTS AND THE COMMERCIAL RATIO: A TEST The main difﬁculty in estimating the gold–silver points lies in the need to incorporate the chronological and geographical elements mentioned above. The changing conditions of arbitrage over time and the complexity of the transactions, along with the need to trace the location of the ‘marginal arbitrageur’, make the task especially arduous. We were fortunate in being able to consult many original documents—here, the Matières ﬁles of the Rothschild Archives—which gave us an invaluable tool for making calculations. The ﬁles contain a hand-written catalogue full of particulars on bullion deliveries all over Europe.67 It is a list of transactions giving the name of the intermediaries used, their terms, and other details. Thanks to this outstanding source, fairly close estimates can be given of the different costs involved in arbitrages between Paris and the French regions. This material was supplemented by the Rothschilds’ correspondence concerning gold and silver operations and the book by Seyd (1868), already referred to. There being

67

Rothschild Archives, Archives Nationales, 132 AQ 86.

40

GOLD-SILVER POINTS

not much information on the physical location of gold in the late 1840s (which makes it difﬁcult to calculate the threshold-point of gold melting and silver minting up until 1850), attention has been focused on the period 1851–70 which is also the one which concerns us most.68 Five main heads of expenditure can be identiﬁed in bimetallic arbitrage. Some are direct: they are sums actually paid out (transport costs, transaction fees, and the cost of coin-minting). Others are indirect: they are opportunity costs resulting from coin wear, and interest loss. We list them below and discuss their evolution over time.

Transportation It is assumed for convenience that the arbitrage is always performed from Paris. Transport costs apply only to whichever metal is collected at a distance from Paris (the other one being readily purchased in the capital). In other words, we think of arbitrages as being performed by a Paris banker who comes to terms with a provincial correspondent. The metal is collected by the correspondent and bought by the Paris banker who assumes the costs of carriage to Paris. This is indeed the way the system worked. For instance, we found a letter which showed that the Rothschilds, when assessing the costs of an arbitrage involving the collection of silver coins near Marseilles (in the Bouches-du-Rhône), included in the transaction the opportunity cost of having the écus transported to Paris.69 What needs to be determined then is the location of the ‘marginal arbitrageur’ for each period of time, that is, the place where the metal needed for melting was most easily found. Over the period 1851–70, gold arrived in Paris in large quantities and was thus always available if the need for an arbitrage involving the melting of gold coins arose. It is therefore possible to ignore the cost of transport where the upper bound (sale of gold, purchase of silver) is concerned, for gold was always at hand. For the reverse transaction (sale of silver, purchase of gold), however, the growing cost of transporting silver to the capital as silver holdings in Paris and the regions surrounding the capital became exhausted has to be reckoned with. The process breaks down into successive periods: (i) Until December 1854, there was still silver in Paris, so that carriage costs may be ignored. (ii) Until December 1856, the Paris region and the Seine basin were the scene of arbitrages. Matières mentions short-distance (Brussels-Lille, for example) carriage fees of around 0.5‰. This is a conservative ﬁgure, which we shall use. (iii) After December 1856, towns like Marseilles were affected in their turn. Collection was even organized, in part, from the port of Marseilles. Matières, dealing with the 1870s, mentions 3.75‰ as the ‘bare haulage’ ( port seul ) fee and 5‰ as the

68

The further back in time one goes, the more difﬁcult it is to obtain information on arbitrages, which necessarily makes the exercise more imprecise.

69

Rothschild Archives, 132 AQ 891 et seq. In other words, the difference between the gold–silver exchange ratio actually quoted in Paris and the implicit exchange ratio in the provinces was primarily the price of shipping either one of the metals from one market-place to another. The ‘return’ could be done without physically moving specie. For the inﬂuence of these techniques on Banque de France policies, see Chapter 5.

THE LOGIC OF ARBITRAGE

41

‘all-in’ (tous débours compris) fee, that is, including all the petty expenses attached to a delivery. These later date ﬁgures are corroborated by other examples discovered in the Rothschild letters. One letter, for example, speaks of ‘ParisMarseilles transport charges: 4‰’.70 This is the value we shall use. (iv) It is likely that, after 1860, the cost of bringing silver to Paris was slightly higher than this, for the silver had to be collected in places largely out of touch with the arbitrage circuits.71 For lack of reliable data, we stick to the 4‰ ﬁgure which, at worst, lies short of the real cost and so does not bias the conclusion. (v) After 1867, silver reappeared. Although still fairly rare, it was imported again and began circulating again in some large towns. A certain quantity was to be found in Paris and especially in Lyons, making it possible once more to ignore transport costs.72

Brokerage and assays According to Seyd (1868) and other sources, brokerage fees charged by Paris Bourse exchange-brokers for bullion transactions during the 1850s and 1860s amounted to 0.1 per cent. It was usually the seller who paid, although the buyer also ‘sometimes’ had to pay a commission. Since bimetallic arbitrage involved a purchase and a sale, the ﬁgure of 1‰ provides a lower limit. As to foundry and assaying charges which were paid for appraising bullion before it was sold or coined, we shall consider that the loss was 1.25‰, for gold and for silver alike.73 This gives a total transaction cost of 2.25 per cent both ways.

Minting The French Mint's ofﬁcial price for coining gold and silver from ths pure metal in the early 1850s was 6 francs and 1.5 francs respectively per kilogram. In March 1854, the price for coining gold was raised to 6.7 francs (see Appendix A).

Abrasion It is important, in a system where metal money was the main item of circulation, to allow for specie wear, that is, the coins’ loss of weight as they went from hand to hand

70

Rothschild Archives, 132 AQ 891, 1 December 1860.

71

Weber (1976) describes how difﬁcult it was, even at the end of the nineteenth century, to travel to Paris from the Departments of the South-West or Brittany. Yet it was in these Departments that the largest stocks of silver were to be found in the 1860s.

72

A good part of Lyons’ silver probably came from Italy. Since 1866, Italy, whose money circulated in France under the terms of the 1865 Convention known as the Latin Monetary Union, had suspended convertibility, as a result of war with Austria. As its ﬁnancial situation worsened, its metal ﬂed abroad and its specie to France where it was accepted even when slightly worn: 5-franc écus and smaller coins ﬂowed towards the French industrial centres where they were found useful for paying wages.

73

The ﬁgure for silver is taken from the Rothschild Archives, Matières ﬁle, 132 AQ 86 (September 1870?): ‘5 kilos of 5-franc coins incur a loss upon melting (melting and assay) of 1.25‰’. Seyd (1868: 389) reported that in Paris the assay of a gold ingot cost 3.90 francs. On the basis of a kilogram (3,100 francs) this gives 1.25‰, the same ﬁgure as the one quoted for silver in the Rothschild Archives.

42

GOLD-SILVER POINTS

and purse to purse. Willis (1901) recounts that, during the 1850s, wear on the old 5-franc écus had become dramatic.74 Several texts mentioning deliveries of French silver report a heavy degree of wear. A minute account of a transaction in the Rothschild Archives75 reports the loss of 53 grams per 1,000 francs, equivalent to 1.06 per cent. In the same vein, Seyd (1868) tells of the shipment to India of 125 cases of 6,000 francs, totalling 750,000 francs. Instead of the ‘right weight’ of 3.750 tonnes (the mass of silver in 750,000 francs fresh from the mint), the cargo weighed only 3.728075 tonnes, indicating that nearly 22 kg, or 0.588 per cent, had been lost. This attrition was (with the cost of transport) certainly the biggest item of loss in bimetallic arbitrage.76 There can be little doubt that these sizeable numbers were commonplace in this type of operation (Seyd's ﬁgures are presumed to be ‘typical’). If the incidence of attrition is to be estimated more accurately, a continuous series of the average wear of gold and silver monies in France needs to be constructed. To do this, in the case of silver, we have used the rate of wear reported by Chevalier (1851) on the basis of experiments carried out by Mint ofﬁcials Dumas and Colmont and statistical estimates by Libri (see Appendix B). In the case of gold, we have relied on the results of a survey conducted in 1868 whose conclusions are reported by Malou (1880).77 The annual rate of wear for gold monies was computed from the latter ﬁgures. It turns out to be very close to the rate for silver monies. The ﬁgures were then applied to the mean French coinage series, determined from the estimates in Chapter 4.

Interest loss When bullion was delivered to the minting shops in Paris, the ‘matter bearer’ (porteur de matières, or supplier of bullion) received a ‘Mint Voucher’, cashable a few days later. Although these securities were not in principle negotiable, it was possible to ask the Director of the Mint to write them out to the Bank of France which, on this condition, consented to cash them, crediting the depositor immediately with an amount equal to the value of the voucher less the bank rate applied to the number of days left to go.78 The Ministerial Decree of 25 February 1835 had set the maturity of Mint Vouchers at 8 days. The increase in minting that followed the discovery of gold in California led to bottlenecks, and a new Decree, dated 18 December 1850, had to be issued. This time, it was decided that the maturity of Mint Vouchers should be so calculated that daily minting would not exceed one million francs (reﬂecting what was perceived at the time as the maximum daily output). According to the British

74

Commonly around 1%, and apparently sometimes much more.

75

A shipment to India. 132 AQ 891, p. 542, 1 December 1860.

76

It is interesting to note that coin wear was not necessarily exogenous. In purely monometallic systems, coin ‘shaving’ was a practice of choice until the nineteenth century for countering exports of the standard metal in times when it was appreciating in value. (See S. Quinn (1996) for a British illustration of this in the 1690s which bears a certain resemblance to the situation in Belgium in the 1850s.)

77

A number of later surveys (conducted at the end of the century) corroborate these ﬁgures.

78

For a comprehensive account of the terms on which the Bank of France took in specie, see Chapter 5.

THE LOGIC OF ARBITRAGE

43

chronicler, Hendriks, this meant that maturity could extend over ‘a month and sometimes more’.79 This estimate was later conﬁrmed by various notes printed in The Economist.80 It was not long, however, before the minting shops stepped up the pace of their work. According to Plessis (1985b: 176), the Paris Mint was soon able to strike 3 million francs a day (or nearly a billion francs per year), not counting occasional subcontracting with other Paris workshops (see Chapter 4). Since annual output never exceeded one billion, production bottlenecks must have been at worst transitory and in any case rare, especially from the mid-1850s on.81 At that stage, the maturity of vouchers probably shrank appreciably. Seyd (1868), in his different calculations, counts on 10 days. The broker, Francis Jourdan, speaks of 15 days.82 The Rothschilds, for their part, note that the Bank of France's interest charges represented a loss of ‘twelve days on average’ where their own operations were concened.83 This is the ﬁgure we shall use. A second time-lag, concerning the manipulation of the metals, should be included. An operation involving a million francs (a common amount with the Rothschilds) required examining 50,000 20-franc coins (weight, 322.6 kg) or 200,000 5-franc coins (weight, 5 tonnes). This could take a long time. In a letter dated 6 March 1874 to the London house (N. M. Rothschild), Rothschild Frères write, ‘As regards the sorting of the coins, packing them in rolls, etc., … Messrs Gadala Saint André were unable to complete the operation in less than six days. If you can do it at your place in less than that time, we should be happy for you to take charge of it’.84 It would seem reasonable therefore to count 15 days for arbitrage delays. Finally, from 1857 to 1867, a third time-lag came from the time spent collecting silver, which could take several days given that silver would be found only in remote regions.85 For this period, an overall lag of 20 days will be counted.

79

As Hendriks declared before the Royal Commission on international coinage (1868: 56):M. Dumas, the Director of the French Mint, has been good enough to communicate to me the particulars of the rules respecting the exchange of coin for bullion in Paris. It appears that the delay in delivery depends upon the quantity of bullion which the Mint may have to coin. A Ministerial decree of 25th February 1835 had ﬁxed at eight days the maturity of warrants for payments made in Paris. The execution of this measure became impossible after the Californian gold discoveries, because more bullion was then brought to the Mint than could be coined in the eight days delay. A ministerial decree of 18th December 1850 … [stated] that the maturity of the coin warrants delivered in payment for gold bullion brought to be changed at the Paris Mint shall be calculated in such a manner as that the director of the coinage shall only have to pay each day the sum of one million francs, following the order in which the bullion shall have been delivered.

80

This was the fault of bottlenecks, in turn due to the unprecedented spate of gold minting that followed the ﬁnds in California. More especially, the upswing in arbitrages late in 1850 and early in 1851 meant harder work for the minting shops. It seems temporarily to have overloaded the capacity of the French mints, which had to prolong their delivery times. See Chapters 3 and 4.

81

Deadlines were nonetheless probably subject to ﬂuctuation. Phases of arbitrage, by nature, followed phases of calm, with the implication that minting did not proceed at a regular pace.

82

Royal Commission (1868: 90).

83

File Matières, 132 AQ 86. The note also says that ‘these terms can change’.

84

132 AQ 891 et seq. Gadala Saint André was a reﬁning house belonging to the Rothschilds. See Chapter 6.

85

See Weber (1976).

44

GOLD-SILVER POINTS

Table 2.2. Cost for an arbitrage involving 1000 francs Period Transport Transaction Minting fee Abrasion Delay Average bound

Upper bound 1851:1 to 1870:9 0 2.25 7.5 0.17 × aga 0.041 × ic 15.69

Lower bound 1851:1 to 1854:3 0 2.25 2 0.16 × asb 0.041 × i 15.39

1854:4 to 1854:12 0 2.25 2.2 0.16 × as 0.041 × i 15.38

1855:1 to 1856:12 0.5 2.25 2.2 0.16 × as 0.041 × i 15.37

1857:1 to 1866:12 4 2.25 2.2 0.16 × as 0.041 × i 15.3

1867:1 to 1870:9 0 2.25 2.2 0.16 × as 0.041 × i 15.35

agis the mean age of gold coin. asis the mean age of silver coin. i is the French interest rate.

a b c

Table 2.2 sums up all the expenses listed above. We are now ready to compare these estimates of the gold–silver points with the commercial ratio on the Paris market. This last series was built from the daily quotes noted in the Paris Mint Archives.86 Figure 2.4 shows the variations in the commercial ratio and the gold–silver points. Two important conclusions stand out. First, the ratio in Paris remained very steady, staying within a 2 per cent band above and below the 15.5 legal ratio. Next, it remained inside the gold–silver points calculated here, suggesting that bimetallic arbitrage functioned continuously. These years may therefore be called a period of effective bimetallism, during which the arrival of gold from California did not exhaust France's stock of silver. In the third quarter of the nineteeth century, the evolution of international gold and silver stocks therefore remained compatible with the maintenance in France of bimetallism at the 15.5 ratio. True, arbitrage geography was responsible for certain regional discrepancies, particularly during the ﬁrst years of substitution. But, all told, gold and silver circulated together in France. Now we can answer the question asked at the beginning of the chapter. From 1850 to 1870, the regime of the French economy—considered as a whole—was one of effective bimetallism. The gold–silver exchange ratio remained practically stable.

86

These matters require a certain amount of care and circumspection. The book by Schneider et al. (1991) contains a ‘beginning of the month’ series of gold prices in Paris which does not, however, make allowance for the change in the manner of quoting gold prices. Boyer-Xambeu et al. (1995) also seem to ignore the issue. The testimony of Feer-Herzog before the Monetary Commission of 1869 contains a series of annual averages of the gold–silver ratio ‘calculated from the table of bullion prices on the Paris Bourse provided by Mr Clément Juglar’ (Minutes of the French Monetary Commission 1869: 147) which differs from the annual averages obtainable from our table. It is possible that the Feer-Herzog series relied on minima and maxima. To settle the issue, numerous checks were made by comparing our ﬁgures with those occasionally reported in the press or mentioned in the archives. Our numbers also tallied closely with those reported in the Rothschild archives.

THE LOGIC OF ARBITRAGE

45

Fig. 2.4.Bimetallic arbitrages on the Paris market 1851–70. Percentage variation from 15.5 parity, upper bound, and lower bound.

Source: Statistical Annexes and Table 2.2. Adjustments, in reaction to changes in international bullion supply, did affect the location of France's specie holdings. But that did not prevent the country from operating without discontinuity its double standard. Our enquiry also shows that the macroeconomic notion of a ‘French economy’ in fact concealed a more subtle reality, that of a microeconomic breakdown based on the geography of transaction costs. In a sense, the French bimetallic system should be regarded as a juxtaposition of small double standard economies bonded by common monetary rules but separated by transaction costs. Silver held in Paris was not a perfect substitute for the silver held in Marseilles, Lyons, or Quimper. This segmentation of the domestic circulation suggests that there was probably no greater discontinuity among nations than there was within them. Everything was a question of variable economic distances and transaction costs. Which meant that the different ‘bimetallic economies’ making up France could slip from one money to the other in times and ways peculiar to themselves. Those who were most exposed were the ﬁrst to react; the more protected ones followed more slowly. But the gold–silver ratio stabilization process ended at one time or another by drawing them all in. This probably explains why many assessments of the double standard are so inconsistent. Several authors, arguing from the fact that certain regions could switch from one standard to the other at any moment, claim that the system was unstable because it

46

GOLD-SILVER POINTS

could not always and everywhere ensure the joint circulation of both metals. But is this the right criterion? What needs rather to be emphasized is that sufﬁcient amounts of gold and silver were always present in France to stabilize their exchange ratio. Regionalization of the monetary roles of gold and silver was in fact the spillway by which the system was stabilized.87 The arrival of Californian gold in France could be likened to a river whose water-level rose between levees of silver and began eating them away. Some critics, seeing the ﬂow increase and the levees crumble, decreed that the system was unstable. Yet it has to be admitted that in the end the dykes held fast.

87

This remark could be generalized. Many of the monetary mechanisms described in classic studies of specie systems, such as those by Hamilton, Spooner, or Vilar, could be reinterpreted in the light of our analysis as invoking economic geography as one face of the adjustment process.

3 Bimetallic Exchange Rates: An Exploration The Exchange rates also responded to change in monetary standards either at home or abroad…. One may be tempted to assert that the level of the exchange rates between two countries was determined by the par between their respective currencies. Very well, but what was the par? R. de Roover (1968) I think M. Chevalier, in his able treatise on gold, establishes conclusively that France, by the dispersion of her silver and absorption of gold, must, while this process lasts, effectualy check any important rise. I will merely add, that the late rise to 5s 2 3/4d and subsequent fall to 5s 2d in the price of silver, appears to me to conﬁrm this view, as it shows that machinery for collecting [silver] on the Continent is set in operation, there is still a supply which can be spared where gold is available as a legal tender. The Economist, 23 April 1859 Nothing was said in the previous chapter on the relation between interregional payments and stabilization of the commercial ratio. The discussion assumed essentially static specie holdings, stirred into movement solely by arbitrage in the wake of external bullion supply shocks. But it is obvious that interregional settlements could inﬂuence the gold–silver ratio. Our discussion brought to light the regionalization of gold and silver circulation, which went hand in glove with substitution of one metal for the other: obviously, a deﬁcit between a region where silver is relatively more abundant and a region where it is relatively scarcer should induce a silver ﬂow. In making a payment, the metal commanding the highest price in the place of payment would naturally be used, even or precisely if it stands at par in the debtor's region. Conversely, a deﬁcit balance between a region where gold is comparatively more abundant and another where this metal is scarce would be cleared by gold shipments. This is a monetary version of Heckscher–Ohlin's theorem: each region tends to specialize in exporting the relatively more plentiful money. These forces were probably more powerful than those of ‘bimetallic arbitrage’, because they came into play well before arbitrages properly speaking had a chance of entering the fray. This may explain why, in Chapter 2, we generally found the gold–silver price ratio a long way off from the gold–silver points we constructed. When silver became rarer in Paris than in the provinces, the provinces could be expected to settle

48

THE LOGIC OF ARBITRAGE

their accounts with Paris in silver; this would in turn relieve the scarcity of silver in the capital. Contemporary sources contain indirect evidence of this mechanism: the 1857 Enquête Monétaire shows that gold penetrated certain regions through trade, not arbitrage, and that silver ﬂowed out for the same reason. Investment for construction work was said to have driven gold into certain regions. In the Ain Department, for instance, ‘work on the Lyons-Geneva railroad … has caused large sums [of gold] to be imported’, for the purpose of paying wages and other expenses. Similarly, in the then Basses-Alpes Department, it was observed that payments from Marseilles to the hinterland were in gold, while Digne remitted silver to Marseilles.88 Interregional balances thus acted as ‘intra-marginal’ correctives with regard to the commercial ratio; they affected it before it hit the bimetallic bounds. Clearly then, we should be able to incorporate regional balances of payments into the same model as was used to study currency substitution in a bimetallic economy. But without a knowledge of interregional exchange rates89 or of interregional trade, such a task cannot be completed. Something not dissimilar can be done, however, if we take an international perspective. Therefore, France's ability to peg the gold–silver exchange rate at or near the legal ratio extended well beyond national boundaries. The gold–silver exchange ratio in London, Hamburg, Amsterdam, and other cities could not deviate from the commercial ratio in Paris by an amount greater than the costs associated with exporting undervalued metal out of France and importing overvalued metal into France. Consider, for instance, how the bimetallic ratio in London was stabilized. Given a price ratio for Paris, the London ratio would lie between two outer bounds set by two symmetrical operations: purchase of gold in London, dispatch to Paris, and sale in exchange for silver sent back to London and sold there (lower bound), or purchase of silver in London for sale in Paris in exchange for gold sent back to London for sale there (upper bound). Calling the commercial ratio in Paris, the commercial ratio in London, and c the cost of sending the metal from one market to the other (with exponent pl for Paris–London, lp for London–Paris and index g for gold, s for silver), we have:

That France stabilized the gold–silver exchange ratio well beyond the hub of the bimetallic system is illustrated in Fig. 3.1. From 1848 to 1870, the gold–silver exchange ratio in London and Hamburg gravitated around the commercial exchange ratio on the Paris market, which itself gravitated around the legal ratio.90 Thus the French economy

88

Documents Relatifs à la Question Monétaire, 1858.

89

In 1848, the Banque de France's monopoly effectively ‘de-regionalized’ the French money market. Exchange rates on Lyons, Bordeaux, Montpellier, or Marseilles gradually disappeared from stock exchange bulletins as it became more advantageous to make transfers via the Banque de France.

90

As mentioned earlier, the theory of the French economy's mediating function has already been advanced by (among others) Yeager (1976) and De Cecco in his New Palgrave article on the Gold Standard. The idea is by no means new. Faucher (1843: 40) wrote, ‘Just as the Paris market acts as intermediary in the gold trade between Europe and Great Britain, with the gold stopping off in Vienna, Hamburg, Amsterdam and Leghorn and staying as commodity in the Banque de France's coffers only to go and sleep as reserves in the vaults of the Bank of England, so the London market acts as intermediary in the silver trade between France and the South American States, including Mexico’.

BIMETALLIC EXCHANGE RATES

49

Fig. 3.1.The commercial ratio in Paris, London, Hamburg

Source: Soetbeer (1889) and Statistical Annexes. acted as a multilateral clearing house: this implies in turn that bullion markets were sensitive not only to gold and silver production but also to the balance of payment situation among the gold bloc, the silver bloc, and the bimetallic bloc. Therefore, at world level, arbitrage and resulting adjustment of international balances were the twin levers of the global bimetallic system.

1. BIMETALLISM AND THE BALANCE OF PAYMENTS: THE CASE OF A LARGE OPEN ECONOMY To see how these two levers operated, this chapter tackles the monetary relations between France and the rest of the world from 1848 to 1870. The central focus will be the interaction between Paris and London. London was a nexus for much of the

50

THE LOGIC OF ARBITRAGE

international demand for both gold and silver, as well as for a major part of the global gold supply. London was where the steamships docked, laden with gold in exchange for Britain's exports. Just as London was the port of departure for specie that went to pay for imports from countries on various standards—and, in particular, from Asia, which was so important to Britain and which generally used silver.91 The London market, therefore, attracted upon itself all the shocks that jolted international equilibrium, before the French economy absorbed them.92 To understand the logic of the interactions between London and Paris, consider the situation of a very large bimetallic country whose monetary circulation is so great in comparison with the international gold and silver markets that it can resolve any discrepancy between bullion supply and demand. Any disturbance of foreign origin is completely buffered by domestic circulation.93 To see how, imagine that an exogenous rise in silver demand occurs on the London market (Fig. 3.2(a)). Since the price of silver is ﬁxed in Paris (if it were not, domestic arbitrage would be possible), its value in London cannot rise above the mint price in France without triggering exports of silver from France to England. To satisfy the extra need across the Channel, a certain quantity [Qa, Qb] of silver would then have to be taken out of France's bimetallic Fig. 3.2.France and the London silver market

91

The Silver Standard was introduced in India in 1853, when there were fears of a depreciation of gold following the massive increase in gold output. For details on Silver Standards in Asia, see Van der Eng (1993).

92

Meaning, of course, that many of the disturbances occurring in both the gold zone and the silver zone can be apprehended by focussing on London and Paris.

93

A situation, which is the exact opposite of that of a ‘small’ economy. The latter, unable to absorb bullion market shocks, lives on a ‘knife edge’, tipping endlessly from gold to silver. This assumption, present in all the knife edge theories, was explicitly formulated by Redish (1990, 1995). Was France a big or a small country? In 1848, France held 2 billion francs in silver (Chapter 4), a ﬁgure to be compared with the annual world output of gold of under 500 million francs, part of which was immediately consumed by trade or industry. From this it may easily be gathered that France, with respect to the surpluses that could arrive on the bullion market, was in no way a ‘small’ country. Once more, the question of the relative importance of the different uses of bullion, already mentioned in Chapter 1, must be kept in mind. For a theoretical formulation of the conditions under which the ‘big’ and ‘small’ country assumptions are respectively validated, see Chapter 7. There it is proved that, if the size of the bimetallic economy tends towards the inﬁnite, it absorbs the entire bullion surplus in exchange for commodity exports. On the other hand, a small economy switches quickly from effective bimetallism to effective monometallism.

BIMETALLIC EXCHANGE RATES

51

circulation, in exchange for goods, gold, or capital.94 Conversely, if an exogenous rise in the supply of silver on the London market were to occur, the disequilibrium would be absorbed by the French money system, which is always a taker at the legal price, and goods, credit, or gold would be exported in exchange. In that case, a quantity [Qa, Qc] of silver would be shipped out of England for turning into écus (Fig. 3.2(b)). The direct effect of variations in the commercial ratio in London is therefore specie ﬂows between the two capitals. As soon as the difference between the London rate and the Paris rate can more than offset shipping costs, the metal starts to move. This is illustrated in Fig. 3.3, which compares metal ﬂows inside and outside France with variations in the London commercial ratio.95 It shows that, in periods when the London commercial ratio was in excess of 15.5 (suggesting a relative appreciation of gold, as before 1848), gold ﬂowed out and silver ﬂowed in. It shows also that, in years when the commercial ratio was tending to dip below 15.5 (indicating a relative appreciation of silver, as between 1852 and 1865), silver ﬂowed out in massive amounts and large quantities of gold ﬂowed in. These cross-ﬂows were not necessarily balanced, suggesting that, if we take the numbers at their face value, goods or capital were used to make up for the difference. The ﬁgure ﬁnally shows that, in periods when the commercial ratio remained close to 15.5 (suggesting absence of disequilibrium, as in 1850–2, 1861, or again 1866–70), the cross-ﬂows stopped and net inﬂows of both metals were recorded. On each occasion, as one metal tended to depreciate, France offered to buy it while selling the appreciating one. In this way, its imports and exports always acted as a compensation for the initial imbalance. Only when there was no imbalance could France absorb both metals indiscriminately. In aggregate, therefore, France was the commercial ratio's ‘master arbitrageur’, taking in metal most of the time, but modifying the gold–silver mix of its intakes in response to commercial ratio variations. Since the double standard thus required endogenous metal ﬂows between the two European capitals,96 its operation was necessarily closely linked to developments in France's payments situation. In the ﬁnal analysis, bullion market equilibrium had always to be brought about at the same time as equilibrium in international balances. This suggests that the exchange rates

94

The mix depends on the relative size of the bimetallic economy. See footnote 6.

95

Note that gold and silver import–export statistics refer to total specie inﬂows and outﬂows, not only to ﬂows between Paris and London. Given the size of the London market, however, and its position as intermediary between France and the Asian Silver Standard countries, it may be considered that aggregate movements provide a good indication of movements between the two capitals.

96

Of course, other exchange markets took part in the process, particularly as concerns the silver zone. Yet our conclusions are unaffected by this. A look at Fig. 3.1 gives some clues: we see that during 1850–70, the Paris ratio was always the one closest to 15.5. The Hamburg ratio, in contrast, reveals a tendency systematically to overvalue silver. This is easily understood if we recall that, Germany being a Silver Standard country, any increase in German money demand would have to be satisﬁed through silver imports, which can occur only if silver is more valuable in Hamburg than in London or Paris. See Flandreau (2002) for a theoretical discussion.

52

THE LOGIC OF ARBITRAGE

Fig. 3.3.Net specie imports (left axis) and commercial ratio (right axis), 1846–70 (franc millions)

Source: Statistical Annexes. between the two cities—London and Paris—played a cardinal role in the operation of the international monetary system of the time.

2. THE PROBLEM OF BIMETALLIC PARITIES Gold Standard literature traditionally accords a central place to the study of exchange rates and, especially, their position vis-à-vis gold ‘import’ and ‘export’ points, the points marking the level where it becomes proﬁtable to import or export gold rather than buy or sell bills of exchange. As Morgenstern (1959) remarked, such a study tells us about strains in the system, its underlying economic dynamics, and how to interpret international bullion ﬂows. The fact is that, depending on the balance of payment situation, the equilibrium exchange rate between two countries settles somewhere within the gold points. If a deﬁcit has to be cleared, bills on foreign countries become scarce and the exchange rate sinks towards the gold export point. Conversely, where there is a surplus, claims on foreign countries are superabundant and the exchange rate rises towards the import point. Expectations of the above processes tend to produce like

BIMETALLIC EXCHANGE RATES

53

effects. The exchange rate's position in relation to gold points thus tells us much about the adjustments taking place.97 A wealth of source material on the subject exists, in the context of the Gold Standard. But the period before 1870 remains practically unexplored. Studies on the exchange rates between single and double standard countries are exceedingly rare.98 The notion of specie import and export points for London and Paris prior to 1880 has received virtually no treatment at all, most probably because the side-by-side existence of two metals raises a number of difﬁcult analytical issues.99 In this chapter we deal with the problem by developing a method that extends the notion of gold points to situations where bimetallism is in force. This method recognizes that gold and silver, along with bills of exchange, may be used to settle international payments. Since gold and silver points now compete against each other, it will be convenient to speak of ‘bullion points’. Once the theoretical nature of bullion points has been clariﬁed, we can move on to compare exchange rate variations with the bounds formed by the bullion points, and from there describe the adjustments in progress. The authors who have studied exchange rate movements under the Gold Standard regime (Viner 1937; Morgenstern 1959) have traditionally stressed the importance of the notion of ‘mint parities’ as the ﬁrst step in deriving bullion points.100 Technically,

97

These principles were fairly widely understood at the time. (They had been discussed in detail during the bullionist controversy.) We ﬁnd them, for instance, clearly expounded by one contemporary chronicler:If a balance became due from the one country to the other, then the bills drawn upon the country least indebted, not being sufﬁcient in amount to satisfy the demand for bills to transmit of the country most indebted, other means more expensive … must be adopted to make up the remainder of the payments. And as those who have remittances to make are willing to give as much more for bills as effecting their payments in other ways would cost, the bills drawn upon the country to which the balance is due rise to a premium proportionated to their scarcity, but limited by the cost of making payments otherwise [i.e. in specie]. (‘The Remarkable Phenomena of the Foreign Exchange’, The Economist, 30 November 1850)

98

Some exceptions may be mentioned, especially Collins (1986) and, in the context of the exchange rate between Great Britain and the United States, Davis and Hughes (1960), Perkins (1978), and Ofﬁcer (1983). None of these works tackles the subject of bimetallic standards head on, however.

99

Drawing on our earlier research (Flandreau 1993) Boyer-Xambeu et al. (1994) reach similar conclusions.

100

The Mint parity, a concept familiar to nineteenth century bullion brokers and international bankers, has often been confused with the ‘equilibrium’ exchange rate between two marketplaces. Equilibrium exchange rates, we have seen, could lie anywhere inside the bullion import and export points. This confusion, more or less implicit in the work of several nineteenth and early twentieth century authors (Ricardo, Bastable, Marshall, Taussig), was corrected by H. D. White (1933: 156). It was ﬁnally cleared up by Viner (1937: 379), who had nevertheless also been guilty of it (Viner 1924). Later, Morgenstern (1959) and Ofﬁcer (1986, 1996) reﬁned the analysis. They linked the exchange rate distribution within the gold points with the nature of the underlying process. The credit goes to Ofﬁcer (1986) for demonstrating that, in the absence of basic long-term divergence among the processes governing currency demand and supply in the different international Gold Standard countries, the exchange rate distribution should be centred within the gold points. (This author unfortunately confused this property with efﬁciency. A Gold Standard may be efﬁcient even when there are persistent outﬂows of gold, as in the case of a gold-producing country which exports specie.) On page 1070, he states, ‘If there is conﬁdence in the gold points, then—in addition to gold arbitrageurs’ operating when the exchange rate is at or beyond a gold point—exchange market speculators, acting within the spread, will transact to turn the exchange rate away from the gold points.’ Krugman (1991) came up with an explicit relation between exchange rate distribution and the underlying process in the limited case where (a) the gold points are exogenous and (b) the underlying process reﬂects a basic long-term divergence (Brownian motion or ‘random walk’). There, for as long as the system stays aﬂoat, the efﬁcient action of speculators keeps the exchange rate near the edges of the band, rather than away from them.

54

THE LOGIC OF ARBITRAGE

these parities correspond to the deﬁnitional ratio between the two national units in question. Since each metallic constitution sets the number of grams of its standard metal per coin, the result is a parity between the standard and the national unit. In England, this ratio, known as the ‘Mint Price’, worked out at 3£ 17s 10 1/2d per ounce of standard gold.101 The person with a debt outstanding could expect to receive gold at the Mint Price.102 So, when two countries share the same standard, a Mint parity can be very easily calculated. A person in Lisbon holding a claim on London would expect the debtor to pay with gold coin in the English capital. Likewise, a claim on Portugal negotiated in the City of London implied an obligation to pay a speciﬁed amount of Portuguese coin in Lisbon. Barring shipping costs etc., the exchange rate should thus stand at the ratio of Mint Prices—the Mint parity. The gold points could then be derived by adding to or subtracting from this parity the cost of actually importing or exporting the coin. In the case of two countries on different monometallic standards (say a Gold Standard and a Silver Standard country), a further difﬁculty arises: the commercial ratio between the two metals has to be considered. The Mint parity may be computed from a knowledge of the respective Mint Prices and of the commercial ratio between gold and silver. This gives a variable parity, which nonetheless makes it possible to pick out, in exchange rate ﬂuctuations, those variations due to changes in the relative values of the two metals, and those arising from bilateral payment imbalances properly speaking.103 The problem was underscored by David Ricardo in connection with the bullion controversies. He remarked that it was necessary, in order to gauge the inﬂuence of an increase in the money supply on exchanges between London and Hamburg, to determine both the par and the metal's import and export points. Unless it is realized that England and Germany were on different standards, there is a danger of drawing erroneous conclusions from particular episodes; gold could, for instance, depreciate at the same time that England is increasing its exports to

101

This deceptive term had its origin in the English situation where the coining of gold was free. The Mint Price (the number of pounds sterling received for taking a certain weight of gold to the Tower of London Mint, as distinct from the Bank Price of 3£ 17s 9d at which the Bank of England took in the metal) was the deﬁning value for the pound. The French Mint Price is not to be confused with the Tarif of the French Mint (la Monnaie ). That was the price at which la Monnaie took in gold, but it made a deduction for manufacturing costs.

102

Minus coin wear, subject to legal limits.

103

The question naturally arises of which commercial ratio to adopt, that of London or that prevailing in the Silver Standard country (see Fig. 3.1). The right strategy seems to be to use the bimetallic ratio of the market where the exchange rate series is collected, as it gives the appropriate benchmark for the local investor.

BIMETALLIC EXCHANGE RATES

55

Germany.104 Provided that this is borne in mind, the basics of gold points analysis can be straightforwardly applied, and there is ‘no basis for differentiating the theory of the foreign exchanges between two currencies having a common metallic standard, on the one hand, and between two currencies on different standards, on the other hand’, as Viner (1937) noted.105 It is nevertheless clear that this argument cannot be directly applied to the double standard system, where the competition between two international instruments of payment must be taken into account. Claims on Paris could be settled with gold or silver. How then evaluate their price? It is a situation of ‘double valuation’, as Ernest Seyd called it. Alongside the gold deﬁnition of French currency, there existed a silver deﬁnition.106 According to whether gold is selected (one kilogram of 9/10th ﬁne gold was worth 155 20-franc coins) or silver (one kilogram of 9/10th ﬁne silver was worth fourty 5-franc coins), two distinct measures—one ﬁxed, the other variable—are obtained for the Mint parity with England.107 With gold, for example, the par was exactly 22.2215 francs to the pound, while the silver parity ﬂuctuated with commercial ratio between the two metals.108 Moreover, since there was no such thing as one commercial ratio, but as many commercial ratios as there were ﬁnancial centres (and in particular one in London and one in Paris), we obtain two variable parities—whence the puzzled question by de Roover, which heads this chapter. Except for the occasional case where the commercial ratio exactly equals 15.5, a more thorough treatment of the problem is needed. Before proceeding, it is in order to look at the data. Figure 3.4 compares variations of sterling–franc exchange rates (measured as the price of sight bills of exchange on Paris negotiated in London) with the gold and silver parities (the latter being set on the basis of

104

According to Jourdan (1861), Ricardo noted that ‘gold being the monetary standard in England, and silver in Hamburg, there is no ﬁxed ratio between the two monies. Their exchange rate will be subject to all the variations occurring in the relative value of the two metals. To determine real parity, the ratio between gold and silver on the date wished for calculating it must be used.’ Jourdan, like Ricardo, assailed the practice of reckoning exchange rates without taking note of the ‘standard effect’. A rise in the pound compared with the mark banco could result from an increase in the price of gold and not necessarily from weakness in the mark. This confusion has been a long time dying. Collins (1986) in a relatively recent study of sterling exchange rates from 1847 to 1878 speaks of ‘secular changes associated with the depreciation of the pound during the 1850s and the gradual improvement in the 1870s’. Although he states elsewhere that a good proportion of these variations may be attributed to silver ﬂuctuations, the terms depreciation and improvement are ambiguous.

105

Viner (1937: 379).

106

Seyd (1868), passim. See also Wolowski (1870: 169).

107

In England, 1,869 sovereigns (1,869 pounds sterling) contained 480 standard Troy ounces of 22-carat (11/12ths ﬁneness) gold. The Troy ounce is equivalent to 31.1035 grams. Tate (1829) relates that the Troy ounce's name comes from the legend that London (Nova Troja ) was founded by Trojan exiles.

108

See, for example, Chevalier (1866: 690–1), ‘The par of exchange has a perfectly solid base when each of the two countries has, de facto or de jure, coinage struck from a single metal and this metal is the same for both’. Yet when it comes to bimetallic parities,a hypothesis is needed to establish the par of exchange. It is that a gram of gold is the par of such and such a number of grams of silver. If we accept the ratio of 15.5 to 1, which was adopted by our lawmakers in An XI, it follows that the par of the English sovereign is 25.22 francs in French silver coins. But this hypothesis, valid on one day, can and must cease to be valid the day after, since nothing is more subject to change, within certain admittedly not very wide limits, than the value of one precious metal with regard to the other.

56

THE LOGIC OF ARBITRAGE

Fig. 3.4.Exchange rates and monetary pars: An unstable relationship

Source: Statistical Annexes: Monthly ﬁgures normalized by the gold parity, or 25.2215. An ordinate of 1.03 thus signiﬁes a 3% depreciation of the franc. The series run from January 1846 to September 1870. the London commercial ratio).109 Prices have been normalized, so that the silver par and the gold par exactly coincide (they are both then equal to 1) when the commercial ratio between the two metals equals 15.5. As Juglar (1877) remarked, the exchange on Paris seems, until the 1850s and at least until 1856, to have borne a certain similarity with the silver parity.110 Subsequently, the correlation became weaker and patchier, reappearing (as in 1861), then disappearing again. There was thus a succession of alternating regimes where, in formal terms, the silver, then the gold parities seemed related to exchange rate variations. According to Juglar, this alternation could be read as the outward sign of the French money system's gradual slide towards gold.111 A similar insight has been formulated in a different historical context, that of the dollar's variations against the pound during the nineteenth century. Davis and

109

See Annexes for a full description of sources and methods.

110

Quoted in Lévy-Leboyer (1977b: 426). C. Juglar had noted the exchange rate highs and lows (annual mean of maxima and minima) from Parisian quotations obtained from stockbrokers. He found from 25.72 to 25.17 for the period 1816–47, and from 25.29 to 25.09 over the period 1848–64. The exchange rate between London and Paris, he remarked, thus tended to rise above the gold par (25.2215) when gold was at a premium, and fall below it when silver appreciated.

111

See Oppers (1993) for a study along the same lines. It tries to show that France, before 1860, had ﬁnished being ‘bled’ of all its silver. The mere observation (see Chapter 2) that silver was still in circulation after 1860 shows just how deceptive this sort of inference can be. For a detailed discussion of this point, see Flandreau (2002).

BIMETALLIC EXCHANGE RATES

57

Hughes (1960), Perkins (1978), and Ofﬁcer (1983) suggest a way of identifying the relevant parity for every given time period. The method involves breaking down a bimetallic country's monetary history (in this case that of the United States) into a succession of ‘epochs’ of de facto monometallism. If it is allowed that, in each epoch, contracts denominated in the unit of account (the dollar) were honoured in one of the two metals exclusively, it is then theoretically possible to apply the gold par for the ‘gold years’ and the silver par for the ‘silver years’.112 The rationale for this method may be clariﬁed as follows. Since the bimetallic debtor can choose the metal used for payment, he will opt for gold or for silver depending on how many purchasing power units one or the other metal will obtain. If silver depreciates, the debtor will be expected to pay in silver, but if it appreciates, he will be expected to pay in gold. This would suppose a unilateral cause-and-effect mechanism in which the state of the bullion market determines the par.113 But this reasoning is ﬂawed. Let us suppose that at a given moment silver is ‘cheap’. According to the foregoing argument, everyone owing money to bimetallic dealers would want to pay them with silver. If there were enough debtors, however, they would create added demand for silver, whose price would rise. There is a strong feedback, in other words, between the metal used for payment and the gold–silver price ratio. This precludes treating their relative price as a purely exogenous variable. The ‘epoch’ method is, in fact, applicable only to a ‘small open economy’ incapable of inﬂuencing the bullion market. It cannot be applied to a large economy with the power to absorb bullion market supply and demand disequilibria. More particularly, it cannot be applied to an economy where de facto bimetallism is known to have prevailed for an extensive period of time.

3. ‘BULLION POINTS’ AND ARBITRATED PARS OF EXCHANGE The method we develop here has the advantage of enabling us to circumvent the problems discussed above. It may be viewed as an ‘agnostic’ evaluation of bimetallic parities, as it makes no assumptions about the composition of the money in circulation. It relies only on an arbitrage relation. The key is to forget about Mint prices and go by the implicit exchange rate between the pound and the franc as deduced from the price of gold and silver on the two relevant markets (London and Paris). On each market gold and silver were quoted in national currency. By comparing the two quotations we obtain what used to be called the ‘arbitrated par of exchange’.114 This was the exchange rate at which the value of gold (or silver) in London would have equalled the value of gold (or silver) in Paris. They are shown on Figure 3.5.

112

See Ofﬁcer (1983: 586 et seq).

113

Such an argument, even supposing its reasoning to be correct, raises numerous practical problems. The commercial ratio is a many-sided thing, since there were not one but many ratios, in New York, London, Paris, Hamburg, Amsterdam, etc. Different operators reacted to different signals and optimum action was therefore not uniform everywhere.

114

See Tate (1829) or Seyd (1868).

58

THE LOGIC OF ARBITRAGE

For the people of the time, calculation of the arbitrated par was indeed the main operational step in international bullion arbitrage. With the quote of one metal on two different markets and a knowledge of the exchange rates between these two markets it was possible to reckon the value of an ingot bought on one market and sold on the other. This exercise revealed the proﬁt opportunities that could arise, in London or Paris, from a variation in the gold price or the silver price. In economic terms, the arbitrated par is the ‘Law of One Price’ in practice. The arbitrated parities among the main exchange markets were routinely published every week in the ﬁnancial press; their computation was standard drill for students of bullion operations as the enclosed excerpt from ‘Tate's cambist’ shows (see Illustration 3.1).115 Arbitrated pars provide also a direct route for assessing gold or silver points, since the two concepts coincide, bullion points being essentially arbitrated parities plus or minus shipping charges. For a given London–Paris exchange rate and silver price in France, the silver price in London could not rise higher than the point where it became proﬁtable to send silver from France to England. Likewise, it could not sink below the point where it became proﬁtable to carry out the reverse transaction.116 If we call the gold price (the silver price ) on the market indicated by the exponent i (p for Paris, l for London), and call the Paris–London exchange rate (francs for a pound) Xp, we obtain:

If we combine these two inequalities and eliminate Xp, we ﬁnd the relation (3.1). This illustrates the point made earlier, namely, that bimetallic arbitrages as such are only a ‘boundary’ operation corresponding to the bimetallic ratio in London reaching its maximum tolerated imbalance between London and Paris, and leading to cross-ﬂows

115

For example, the 2 June 1855 issue of The Economist noted,The quotation of gold at Paris is about at par (according to the latest tariff), which, at the English mint price of 3£ 17s 10 1/2d per ounce for standard gold, gives an exchange of 25.17; and the exchange at Paris on London at short being 25.17 1/2, it follows that gold is about the same price at Paris and London.See also the different editions of Tate's Manual, which gives arbitrated par tables. The Economist habitually printed the arbitrated par for Paris, Hamburg, and later New York. The reader wishing to have an idea of a contemporary discussion of this kind of computation can consult a series of very instructive articles published in the Banker's Magazine of London from January to December 1851. The articles contain several detailed descriptions of bills-to-bullion arbitrage formulae.

116

It cost very little to transfer bills of exchange from one market place to another. A comparison of the London–Paris short-term exchange rate in Paris and in London reveals variations of less than 0.2 per cent. The franc value of a claim on London was therefore to all purposes equal to the countervalue in sterling of a claim on Paris (otherwise, a paper arbitrage was possible). The strong link in Figure 3.5, ‘visible to the naked eye’, between the price of gold and the price of the pound in Paris should not come as a surprise. The holder of a claim on London would always expect to be paid in gold. His asset was therefore a close substitute for gold traded on the stock exchange (shipping charges, which were more or less constant, apart). The arbitrated par for gold was thus tightly correlated with the exchange rate, just as the arbitrated par for silver was tightly correlated with the mark banco-French franc exchange rate (not shown here).

BIMETALLIC EXCHANGE RATES

59

Illustration 3.1.Tate on arbitrated parities

Source:Tate (1836: 209–10). of bullion. Before these got under way, intra-marginal dealings in a single metal would occur, triggered by the exchange rate between the two capitals—for example, purchase of gold in Paris, sale in London against a bill of exchange, then negotiated in Paris (Equations (3.2) and (3.3)). A large part of the commercial ratio's stabilization was thus channelled through the exchange market. Equations (3.2) and (3.3) also enable us to work out the gold points, silver points and, by the same token, bullion points. When the two inequalities are divided respectively by the price of gold and the price of silver in London, they give Equations (3.4) and (3.5), which deﬁne the exchange rate levels at which gold and silver are shipped:

60

THE LOGIC OF ARBITRAGE

Fig. 3.5.Exchange rates and arbitrated pars

Source: Statistical Annex: Monthly ﬁgures normalized by the gold parity, or 25.2215. An ordinate of 1.03 thus signiﬁes a 3% depreciation of the franc. The series run from January 1846 to September 1870. Bullion points are straightforwardly derived from (3.4) and (3.5). The best way normally for a French debtor to settle a sterling debt in England was to buy a bill of exchange on London, provided enough such bills were available. If they were scarce, their price would rise. Obviously, the price ought not to rise above the level at which it became preferable to send metal as payment. In that case, two transactions were possible. The French debtor could buy gold on the Paris market and have it shipped to London, or he could ship silver.117 Symmetrically, a London debtor needing to remit to France had three choices. He could procure a bill on Paris or, if the exchange rate was

117

The exchange rate gyrations that coincided with the fall in the commercial ratio in 1850 generated a number of articles in the ﬁnancial press of the day. The articles show that the overall principles of our analysis were perfectly understood. An article in the January 1851 issue of the Banker's Magazine (p. 67) discussed the situation where the exchange rate between Paris and London stood at 25.629 francs to the pound and the gold premium in Paris produced an arbitrated par of 25.45 francs to the pound.A choice of two courses is presented at the same moment to a merchant in Paris desiring to remit say £100 to London. First, he may either pay silver for as much gold in Paris as when remitted in London will pay his debt, or a cost to him of 25.45 per £; or secondly, he may buy a bill on London at Paris, at the rate of 25.625 per £, and so pay 17.5 cents per £ more for the bill than he would pay for the gold …. In this case the arbitration is said to be in favour of England, because the circumstance of gold being dearer in London than in Paris is certain to prevent the efﬂux of gold from London to that place, and to some extent, perhaps may cause an importation of gold from Paris into London.

BIMETALLIC EXCHANGE RATES

61

too unfavourable, he could buy gold or silver in London and have it sent to Paris.118 The exchange rate must therefore lie within a band, which represents the range of overlap between gold and silver points. The formula is:

4. CONSTRUCTING THE BULLION POINTS The last three formulae provide the much-needed yardstick for measuring changes in exchange rates and thus analyse the dynamics of franc–sterling exchange rates after the Gold Rush. Before going further, however, it still remains to estimate the costs involved in shipping metal between the two capitals. As it was a routine operation, the necessary ﬁgures are not hard to come by. Detailed information is contained in Seyd's book (1868) and his testimony to the 1870 Commission.119 The works by Le Touzé (1868) and Haupt (1872) provide additional sources, which can be doublechecked against documents in the Rothschild archives. The estimates are discussed in Box 3.1 and summarized in Table 3.1. Since we know the price of silver and gold in both Paris and London (see Annexes), we are now in a position to construct the import and export points for gold (Fig. 3.6) and silver (Fig. 3.7) from 1848 to 1870. This in turn enables us to derive the bullion points (Fig. 3.8). The latter series was built by ascertaining the maximum import points for gold and silver, and the minimum export points for both metals, in each period, as described above (Equation (3.6)). Finally, the exchange rate between Paris and London was plotted on each ﬁgure. The rate was obtained from The Economist (sight quotations on Paris), always taking the lowest rate.120 The series is given in Annex. Figures 3.6 and 3.7 enable us to match the ‘strength’ or ‘weakness’ of exchange rates against the gold and silver points. When the exchange rate approaches the bands bullion ﬂows become more likely, and conversely, such movements are less likely the further away it is from the bounds.121 Of course, since the series are estimates, metal imports and exports could occur even before the exchange rate hit the upper or lower bounds.122 The

118

It is naturally unnecessary for the importer himself to work out this sum. His banker will take care of it.

119

The annexes attached to the Enquiry report contain a meticulous account of the remittances of gold between the two capitals by type of instrument used: new coins, used coins, ingots.

120

In fact, the Course of the Exchange indicated a price range. The spread was generally 5 centimes for 25 francs, or 0.2 per cent.

121

Bullion broker handbooks were always careful to point out that bullion movement always begins before the gold or silver points are actually reached. The reason is twofold. First, there may be speculative shipments. Second, as will become clear in Chapter 6, arbitrage activity involves some expertise and the productivity of different dealers may vary. As a result, some arbitragerus can proﬁt from better terms for their transactions and so afford to intervene earlier.

122

Unfortunately, this caveat has largely been ignored in the Gold Standard efﬁciency literature, and the result is a somewhat narrow understanding of the signiﬁcance of ‘gold point violations’. Exchange rates and the gold points, being estimates, are by deﬁnition subject to a certain variability. It is the trend and distribution that matter, not the position of a particular observation.

62

THE LOGIC OF ARBITRAGE

Box 3.1. Estimating the costs of international arbitrage Brokerage : Gold shipments from London to Paris did not ordinarily carry brokerage costs. Gold was usually bought from the Bank of England at the Mint Price of 3£ 17s 10 1/2d and sold charge-free on the Paris market. Gold shipped from Paris to London, on the other hand, bore a 1‰ commission payable in France (Bourse sales fee—see Seyd's testimony for the 1870 Monetary Enquiry), and another one paid to the Bank of England (Bank of England buying price, £ 3.17.9 per standard ounce, implying an effective commission of 1.6‰). The brokerage fee for silver bought in London was 1/8 per cent (i.e. 1.25‰). In the case of shipments of silver from Paris to London, the buyer usually paid the Bourse a service charge of 1‰ (Seyd 1868). Transportation : Available ﬁgures for shipping charges (which included petty handling fees as well as freight and insurance) exhibit a downward trend. In the early 1850s, gold shipping costs between London and Paris amounted to 5‰ (Tate 1852), 3‰ in 1860 and 1868 (Rothschild Archives and Seyd 1868), 2.5‰ in 1870 (Monetary Enquiry), and 1.5‰ in 1880 (Haupt 1882). In the case of silver, these costs were respectively 6‰ (Tate 1852), 3.6‰ in the late 1860s (Seyd 1868), and slightly less than 2‰ in 1878 (via the Maison Lebeau in Boulogne, Rothschild Archives). We adopt as reasonable estimates 5‰ and 6‰ respectively for gold and silver until the end of 1854, that is, until the full development of the railway network of Compagnie du Nord, and 3 and 3.6‰ for the rest of the period. Assay and ﬁneness : This head refers to the costs of determining the ﬁneness of the metal negotiated. The assays performed in London were reputed to be less demanding than those done in Paris. Exporters consequently could expect to make a slight loss (from Paris to London) or a slight gain (from London to Paris), of the order of 0.75‰ for gold and 1‰ for silver. Seyd (1868) and the 1870 Enquiry. The Rothschild Archives (132 AQ 86) for their part report that ‘gold ingots from Paris to London generally make a loss of 3/4‰ on ﬁneness to which assay costs of 0.25–0.30‰ must be added.’ As for silver, Seyd (1868) notes, ‘It turns out by experience that the French Assays are 1 to 2 per mille higher than English Indian Assays—at all events English shippers allege this to be the case and charge the French with the fact.’ Two reasons are generally given to explain the difference. First, French assayers had a ﬁner scale of measurement than the one used in Great Britain (according to Tate (1856)), 13 to 10 for gold and 2 to 1 for silver. Second, the assay technique used in France was reputedly more accurate than the English method. This is, in any case, what is said in all the manuals dealing with international bullion trans-shipment. Seyd (1868: 415) writes, for example, ‘The French method of assaying is nevertheless better than our own, and we know it is acknowledged that English Assays, according to the present fashion of reporting them, are always under the mark, so that the real cause of the difference arises on this side.’ On both sides of the Channel, assay fees were 0.25‰ for gold (Rothschild Archives) and, according to Seyd (1868) and Haupt (1872), 0.3‰ for silver. Actual transaction proceeds could differ slightly from expected returns on account of small assaying variations, but we shall neglect this factor. Interest loss : The opportunity cost resulting from the length of the operation must also be considered. The transaction had to be organized; the metal had to be shipped; and its ﬁneness had to be determined by the host market. Seyd (1868) reports that the Bank of England, for example, took 2 days to credit the ingot depositor's account so as to have time to perform the assays. The transaction time was rounded off at 10 days so as to allow for a possible risk premium. It was also accepted that the arbitrage should be paid for on the most favourable market. The ‘time factor’, in other words, was set by the best going discount rate, that is, either that of the Banque de France or that of the Bank of England. Finally, a ‘normal’ proﬁt markup is added, as is common practice in the study of gold points, equal to the usual amount of bank commissions billed for international transactions. We set it at 1/8% following Seyd (1868) and Ofﬁcer (1986, 1996).

BIMETALLIC EXCHANGE RATES

63

Table 3.1. Estimated international arbitrage costs broken down by main item (‰) Shipments Brokerage buying Brokerage selling Shippingb Shippingc Assay and ﬁneness Interest loss Normal proﬁt a b c

Gold: London → Paris 0 0 5 3 −0.5 10 days 1.25

Gold: Paris → Lon- Silver: London → don Paris 1 0.125 a 1.6 0 5 6 3 3.6 1 −0.7 10 days 10 days 1.25 1.25

Silver: Paris → London 0.1 0 6 3.6 1.3 10 days 1.25

Bank of England. Until 1854. After 1854.

essential notion here is statistical, not deterministic: it is the distance between exchange rates and the gold or silver points. If the exchange rate is close to the export point of French gold, for example, this would indicate that gold is tending to leave France, or that it is more probable that it will go out than come in. Figure 3.6 displays several characteristic features. The exchange rate, after nudging close to the gold export point in 1846 and 1847, lay more often (from 1848 to 1870) near the gold import point. Exceptions were some brief peaks in 1852 and 1855 and a more lasting one in 1861. On the whole, then, during the entire period when gold from California and Australia was ﬂowing into Europe, the exchange rates between London and Paris in relation to the gold import and export points showed relative strength on Paris, which in turn tended to favour an absorption of gold into the French monetary system. This trend conﬁrms the one detected with regard to actual bullion

64

THE LOGIC OF ARBITRAGE

Fig. 3.6.The gold points and the exchange ratio

Source: Table 3.1 and Statistical Annexes, Tables L and P. Monthly ﬁgures normalized by parity. Fig. 3.7.The silver points and the exchange ratio

Source: Table 3.1 and Statistical Annexes, Tables L, M, and N. Monthly ﬁgures normalized by parity.

BIMETALLIC EXCHANGE RATES

65

Fig. 3.8.The bullion points and the exchange ratio

Source: Table 3.1 and Statistical Annexes, Tables L, M, N, and P. Monthly ﬁgures normalized by parity. ﬂows (Fig. 3.3), which revealed (slight) exports of gold in 1846 and 1847, entries from 1848, and even stronger entries from 1853 until the end of the period.123 Figure 3.7 completes the picture. Until 1850, the exchange rate tended to lie around the middle of the silver points, occasionally edging close to the silver export (as in 1846) or import point (as during some months of 1848 and particularly in 1849). From the end of 1850, however, and again from late 1852 to 1860, then, to a lesser extent, until the mid-1860s, the exchange rate hugged the silver export ceiling. During these years, the franc–sterling exchange rate reveals ‘weakness’ on Paris. Finally, from 1865 till the end of the period, the rate hovered close to the lower bound, the silver import point. The exchange rate was again favourable to Paris. Here again, bullion ﬂow records are consistent with the evidence. In the years prior to 1850, silver was being imported into France. The trend slowed until 1852, when it reversed, and heavy outﬂows of silver occurred, lasting until 1860. Smaller outﬂows continued until 1864. After 1865, the trend reversed again, and silver ﬂowed in once more, until 1870. To make our ﬁndings even more explicit, it is convenient to compute the distribution of exchange rates within the gold and silver points for given epochs. The method consists on identifying in which portion of the gold or silver points the exchange rates are most

123

Since Morgenstern's (1965) withering attack on economic statistics, which precisely took as a case in point bullion ﬂow statistics, it has become customary to stress the unreliability of ofﬁcial ﬁgures on specie ﬂows. Perhaps it should be said more often that they are not by nature inferior to others. This has been emphasized by Goodhart (1972) who pointed out that, as general indicators, bullion statistics were very reliable. The consistency which bullion ﬂows display with both coinage series (Chapter 4) and exchange rates (both series being known with considerable accuracy) suggests that they are not bad at all.

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often found. Gold and silver points are split into ﬁve intervals and the number of occurrences of the exchange rate in a given interval is counted (a complete description of the method is given in Flandreau 1996a). Figure 3.9 shows the exchange rate's distribution in relation to the gold points and silver points over the periods 1848–65 and 1866–70. As can be seen, the period 1848–65, which was marked by gold inﬂows and silver outﬂows, displayed a ‘strong’ franc in terms of gold but a ‘weak’ franc in terms of silver. After 1865, Paris was strong with respect to both gold and silver. These observations raise an interesting point. Studies of exchange rates under the Gold Standard generally spotlight three kinds of situation. Exchange rates can be in a country's favour, that is to say, close to the gold or silver import point. They can Fig. 3.9.Distribution of the exchange ratio within the gold points and the silver points (proportion of observations in each segment): (a) January 1848 to December 1865, (b) January 1866 to September 1870

Source:Author's calculations.

BIMETALLIC EXCHANGE RATES

67

be unfavourable, that is, close to the export point. Or they can be ‘neutral’, inside the import–export spread, without therefore provoking any stabilizing ﬂow.124 The double standard, however, since it rests on a monetary dualism, increases the number of possible conﬁgurations. Exchange rates can run favourable to France as regards gold but be unfavourable as regards silver (period 1848–65), favourable to France as regards both gold and silver (post-1865), or unfavourable to France on both counts (as during several months in 1846). How can these apparently contradictory positions be interpreted? In trying to understand the multitude of exchange conﬁgurations under a double standard regime, we may imagine a simpliﬁed world economy comprising solely France and ‘The Rest of the World’, in which the international bullion market is located.125 Global monetary equilibrium is then the solution to two related problems: the adjustment of France's balance of payments (which can be positive, negative, or zero), and the adjustment of the bullion markets (which can experience excess supply, excess demand, or a balance of the two).126 The variety of conﬁgurations may then be explained by the fact that France was required at the same time to stabilize the commercial ratio between the two metals and adjust the amount and structure of its balance of payments. It seems reasonable to suppose that the post-1848 gold output created excess supply. One possibility was that France ‘arbitrated’ the surplus by selling its silver in exchange for Californian gold. In the end, however, everything depended on its balance of payments situation. The arrival of Californian gold would not have required outﬂows of silver if France had offered to buy all the gold, which the other nations did not want, that is, if France had posted a surplus exactly equal to the amount of gold still on the market. But this was not the case. It was impossible for France, on account of the surplus it wished to achieve (the amount of metal it wished to keep), to absorb the whole of the excess gold supply. The joint balancing of the bullion market and France's payment balance thus required the export of a certain amount of silver, as a counterpart to imports of gold. Only the difference between the over-supply of gold and the French balance of payments surplus needed to be arbitrated by the Paris market through currency substitution in France's bimetallic circulation. International equilibrium determined the amount of gold that ﬂowed into France and the (smaller) amount of silver that ﬂowed out. This in turn required that exchange rates be favourable to France in terms of gold but unfavourable in terms of silver. This is illustrated by Fig. 3.9, which shows

124

As noted above (footnote 13), this state has been described by some authors as ‘exchange rates in equilibrium’. Situations where bullion moves in or out should also be considered as equilibria. The only difference is that equilibrium is achieved by bullion movement, not by a movement of exchange rates within the gold points.

125

Intellectually, the exercise involves combining the partial equilibrium represented by the adjustment of the gold and silver markets in London (the aggregation of the crossbalances between the gold zone and the silver zone) with the partial equilibrium represented by the adjustment of France's balance of payments. The combination of these partial equilibria deﬁnes a general equilibrium in which movements of bullion in or out of France correspond respectively to excess supply of, and excess demand for, gold and silver in the Rest of the World.

126

In practice, some situations can be ruled out because they contravene accounting identities. It is impossible, for example, for excess supply on the gold and silver market (implying a net absorption of bullion in France) and a French payments deﬁcit (implying a net outﬂow of bullion) to exist in equilibrium. Similarly, there cannot be simultaneously excess demand for gold and silver and a French balance of payments surplus. And so on.

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that, between the Gold Rush and 1865, exchange rates tended to lie close to the gold import point and the silver export point. It was not a contradiction; there was no other way to achieve a cross-adjustment. This was not, of course, the only conceivable conﬁguration. After 1865, the bullion market situation and France's international position concurred to resolve the international equilibrium differently. France had this time accumulated several payment surpluses, just as silver production was starting to rise and the gold stock growth rate was slowing down. Silver was becoming less scarce, gold less plentiful, and France was wanting to import bullion. This explains why exchange rates, as Fig. 3.9 shows, then stayed close to the gold and silver import points.127 Several important conclusions ﬂow from this. It should now be clear that exchange rates under the international bimetallism regime cannot be studied without keeping in mind the underlying principle of bimetallism's operation. The ‘rise’ and ‘fall’ of the exchange rate between London and Paris is informative only if these movements are qualiﬁed with a reference (gold, silver) indicating against what the exchange rate has moved up or down. Under a bimetallic regime, the exchange rate is not simply the mirror image of the balance of payments. It mirrors, if we may say so, a double image, that of the balance of payments and that of the international bullion market. Interpreting the exchange position between the two capitals on a particular date thus demands a multidimensional explanation each time, which takes into account the various factors contributing to a given equilibrium. A subtle interaction among the gold points, the silver points, and the exchange rate jointly smoothed the international adjustment between the gold zone and the silver zone, on the one hand, and France's external accounts, on the other.

5. THE BIMETALLIC ‘SNAKE’ So far, gold and silver points have been treated as exogenous. This simpliﬁcation, adopted for the sake of clarity, must now be abandoned, so as to describe fully the machinery of transmission, which was set in motion by the operation of bimetallism. Gold and silver points indeed depended on the metals’ prices in the two capitals. But these prices themselves responded to ﬂows of metal between London and Paris. There was thus a return effect on the import and export points. The system rested on a feedback between the exchange rates and the metals’ prices in both capitals. To make the reasoning clearer, let us consider the situation where the Paris–London exchange rate lies inside the gold and silver points and follow what happens when, all else being equal, there is an increase in the gold supply in London (Phase 1 in Fig. 3.10).128 Since the value of gold on the London market is practically ﬁxed there

127

Other situations were possible. During 1846, exchange rates in Paris were unfavourable for both gold and silver. Then, in 1849, they were favourable for gold and generally neutral for silver. The French payments surplus sufﬁced to absorb the over-supply on the gold market.

128

For reasons of historical relevance (after 1848, gold was in over-supply), we have preferred to study this situation rather than the symmetrically opposite one, that of an oversupply of silver. The argumentation that follows can easily be reversed to describe the opposite case. This type of sequential reasoning has a long pedigree in economics, dating back to David Hume (Hume 1758). We ourselves view the sequence of adjustments as more logical than chronological. In reality, the various adjustments can quite well take place simultaneously, including by anticipation of what will happen. The formal analysis in Flandreau (2002) was developed as an attempt to provide a more systematic discussion of these matters.

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Fig. 3.10.Constriction and dilation of the bullion points,Phase 1: The bullion points are dilated to their maximum. The exchange ratio lies in the middle of the band; Phase 2: The rise of the price of silver in London drives down the silver points. The bullion points are compressed and silver ﬂows from France to England; Phase 3: The export of silver increases claims on London. The exchange rate on Paris improves and falls to the gold entry point; Phase 4: The export of silver makes it scarcer in Paris, so that the silver points are partially raised. The import of gold into France drives down its price in Paris, lowering the gold points.

(between 3£ 17s 9d and 3£ 17s 10 1/2d per standard ounce), the increase in the supply of gold, if it is large enough, will not lower its price but rather raise all other prices in terms of gold, including that of silver. The price of silver in London will therefore increase. At that point, the situation of the other markets has not yet changed—Paris has not yet received or exported any metal. The rise in the price of silver in London lowers the silver points.129 If this goes on long enough, the silver export point ends up dipping below the gold export point, and the silver import point also goes below the gold import point. Since gold points remain so far ﬁxed, the bullion export point will be a silver point, while the bullion import point will be a gold point. As the process continues, the distance between the effective upper and lower bullion points shrinks (Phase 2 of Fig. 3.10). How much ‘constriction’ there will be depends, naturally, on how steeply silver appreciates on the London market. At the extreme limit, the silver export point might fall as low as the gold import point, to the stage where the exchange rate is ‘choked’ between the import point of one metal and the export point of the other. The bandwidth between the upper bullion point and the lower would then reduce to zero and cross-ﬂows (outﬂow of silver, inﬂow of gold) would occur: an extreme situation, which may be interpreted as bimetallic arbitrage. In any event, the downturn

129

The price of silver in London is in the denominator of Equation (3.6).

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of the silver export point sooner or later brings it into contact with the exchange rate, even before total constriction occurs. When this happens, silver is bought on the Paris Bourse and dispatched to London. Shipping silver from Paris to London requires buying exchange on Paris, increasing the demand for exchange there, and improving the value of the franc in consequence. It takes fewer francs to buy a pound: the exchange rate appreciates and falls towards the gold import point (Phase 3 in Fig. 3.10). Given time, the silver price rise ﬁrst experienced in London spreads to the Paris market. The process, which tends to reduce the difference between London and Paris silver prices, ends by pushing up the silver points and so partly corrects the initial trend.130 On the other hand, the appreciation of the exchange rate having made it proﬁtable to ship gold to France, the gold points also adjust. The transfer, by increasing the quantity of gold in Paris, drives down the price of gold on the Paris market and thus lowers the gold points. The twin movement of lowering the gold points and raising the silver points has the effect of re-expanding the bullion points. They move apart and become stable again, albeit at a slightly lower level (Phase 4 in Fig. 3.10). Suppose that the process repeats itself. The same sequence—drop in the silver points, constriction, partial rebound of the silver points, drop in the gold points—recurs. The bullion points appear to drift gradually downwards. But the drift cannot last forever, since the bullion points are themselves subject to absolute limits. To take the case of the gold points, it has already been seen that the price of gold in Paris lay inside a band deﬁned by minting costs (ﬂoor) and melting costs (ceiling). Similarly with silver, the price in Paris could not climb higher than the level where national arbitrages came into play: collection and melting of silver monetary balances in France, sale in Paris. The prices of gold and silver on the Paris market are contained within limits, with the result that their prices on the London market, and eventually also the gold and silver points, are kept within bounds.131 It may therefore be surmised that the gold import point in France could not keep falling forever. Indeed, with the inﬂow of bullion from California, gold prices on the Paris stock market declined, but not beyond the Mint Tarif. At this extreme limit, gold was brought in direct from London to the Paris Mint workshops. That is to say, the endogenous ﬂuctuations in the bullion points occurred within a broader exogenous band, like a snake in a tunnel.

6. 1850: A CASE STUDY The latter months of 1850 provide an excellent illustration of the preceding analysis. At the end of the year, the exchange rate of the pound, which had been worth 25.32 in

130

The correction cannot be complete unless the rise in the price of silver in Paris (caused by silver exports) is comparable to the rise in London. (If the rise in Paris is smaller than in London, under-correction will occur, and if it is greater there will be over-correction.) Since we start with a phase where silver in France is plentiful, over-correction is unlikely, for silver will always be less scarce over the short term in Paris than in London.

131

The lower bullion point is the maximum for the gold import point and the silver import point. It follows that if there can be a lower bound for the gold import point, the same will be true for the lower bullion point.

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August 1850, fell in the space of a few weeks to 24.875. This 2 per cent drop, while small in absolute terms, dismayed the people of the time as an unheard-of depreciation. It gave rise to much head-scratching. The economic tools then available could not adequately explain the phenomenon. It was especially difﬁcult, given the large volume of British commodity exports, to see in it the consequence of a sharp deterioration in the trade balance. What was more, the gold now ﬂowing out of London had come primarily from trade with America; it bled neither the domestic circulation nor the Bank of England's reserves. Was it possible for exchange rates to deteriorate that far without any fear of a drain on currency?132 The ideas we have set out provide an explanation of what had happened. The surge in gold production from California was bound, other things being equal, to depreciate gold in relation to silver. But as long as the Continent had a favourable balance with Great Britain and wished to increase its bullion stocks, gold depreciation could be avoided. Alternatively, as long as British money demand remained strong enough, gold would not be in over-supply. On the other hand, if Great Britain posted a trade surplus or had no wish to increase its gold stock, any further shipment of American gold would arrive on an already saturated market and would cause the value of gold to fall. This is what must have happened. At the end of 1850, the price of silver in London began to climb. The silver export point (from France) was reached in combination with the gold price fall, setting off silver exports from the Continent and weakening the exchange rate against the Franc. Paris was settling its debts with silver and taking in gold. At the end of December 1850 and during the early months of 1851, the exchange rate was choked between the silver export point and the gold import point (see Fig. 3.11), in a manner that closely resembles the dynamics described in Phase 2 of Fig. 3.10. This triggered cross-movements of specie that soon stabilized the commercial ratio, if at a lower level. As predicted by our analysis, it did not take long before the bullion points widened again. What was at issue was not then a depreciation of the pound determined by an exogenous payment imbalance; it was a drop caused by the need to mop up the gold glut that was swamping the City. For lack of sufﬁcient demand for gold in England, the adjustment had to be mediated by France. This entailed depreciation of the pound, which again was nothing more than the mirror image of the rise in the price of silver. Therefore, the ‘swing’ in exchange rates that occurred at the end of 1850 resulted from

132

The economic and ﬁnancial journals of the day carry long discussions on the pound's discomﬁture, which very much upset people at the time. After the event, the main (and in our view, correct) opinion was that much of the turmoil was the result of relative movements in gold and silver prices. Karl Marx, who was an assiduous reader of the British and American press, adopts this view in a passage from Das Kapital (Marx (1968), pp. 1264–5) in which he quotes an article from The Economist of ‘11 January 1851’ (in effect January 4, see next footnote):If it is a matter of the exchange between countries one of which uses silver as currency and the other gold, the exchange rate will depend on ﬂuctuations in the relative value of these two metals, whose parity will necessarily be affected. This case is illustrated by the exchange rates in 1850. They were unfavourable to England, whose exports nonetheless increased greatly. Yet there was no efﬂux of gold. This was the result of the momentary rise in the value of silver compared to that of gold.

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Fig. 3.11.The ‘crisis’ of 1850

Source: Statistical Annexes. Monthly ﬁgures normalized by parity. the rarefaction of silver in London or, which is the same thing, from the slide in gold prices. It had nothing to do therefore with British exports. Far from reﬂecting a crisis, the episode illustrated a typical operating mode of the international monetary system of the time. There was no reason to panic; the pound's slippage would regulate itself. The ﬁnancial world was merely beginning to learn the laws of bimetallism as an international regime. This new awareness was well expressed by The Economist, which rightly declared that the process had ‘natural limits’:133 There are no grounds for these extreme apprehensions. Examine the subject a little further and we immediately discover natural limits to these operations. The corrective is at work at both ends: in France, where it is now proﬁtable to import gold; and in England, where it is now proﬁtable to export gold. … What an insigniﬁcant portion of the entire quantity of silver which France has to spare in substitution for gold would be sufﬁcient to restore the equilibrium of value between the two metals … But while the tendency to restore the exchange is in operation abroad there is already another in operation here. Bills upon England have already become more scarce abroad. Bills on the Continent have become more plentiful in

133

The Economist, Saturday 4 January 1851: 1–3, ‘The Foreign Exchanges: Gold and Silver—The Currencies of France and the United States’.

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London, in consequences of the transmission of bullion which has already taken place to Paris; and the rates of exchange are, consequently, already higher. The motive to import gold in Paris is becoming less, and the motive to export it is also becoming less in London. (Vol IX 384: 1–2)

7. CONCLUSION Several conclusions emerge at this stage. First it appears that the operation of international bimetallism had a profound effect on exchange rate behaviour between the leading European ﬁnancial centres of the time, London and Paris. This inﬂuence was not, however, exerted in a completely linear fashion. It expressed itself rather through a series of interand retro-actions that involved the prices of gold and silver in Paris and London, exchange rates and, ﬁnally, bullion movements. All these interlinked processes were the endogenous reaction to the need for bringing bullion markets and international payment balances into equilibrium at a virtually ﬁxed price.134 The gold glut ﬁrst observed on the bullion market ﬁnally set the gold points and silver points in motion towards an easing of the initial tensions. The point of export from France of the metal lacking in London went down, triggering arbitrage that corrected the trend, and absorption in Paris of the excess metal. The ‘shock’ was eventually buffered in France, from which the metal in short supply in London had been collected and exported, and into which the metal in over-supply in London had been imported then changed into coin. The relative strength of the France exchange rate with respect to the gold points, and its relative weakness with respect to the silver points were simply phases in a process of adjustment, in a succession of constrictions and dilations of a bimetallic serpent that digested disequilibria one after the other. The present chapter shows that it is imperative, in order to understand international monetary relations in the preGold Standard era, to recognize the key role, which the ‘breathing’ of bimetallic economies exercised on global specie ﬂows. It has been seen that the notions of exchange rate ‘strength’ or ‘weakness’ (as used in ordinary Gold Standard analysis) must be reﬁned when speaking of the pre-1873 international monetary regime. From 1850 to 1865, the exchange rate tended to ‘favour’ France where gold was concerned, but ‘run against’ it as regards silver. Such situations were typical of the system's normal operation. It was necessary, in order to stabilize the gold–silver exchange ratio, to attract gold to France and silver away from France. Exchange rate movements were thus manifestations of equilibrium. This chapter has also explored how treating the bimetallic economy as a large open economy gives a better understanding of the system's operation. A large bimetallic country stabilizes the gold–silver ratio of the other economies. This clashes with the views of most of the authors who have studied the exchange rates between double standard and monometallic countries. They base their reasoning on the implicit assumption that

134

For an in depth discussion of more technical issues, see Flandreau (1996a), on which this chapter draws. For a theoretical analysis of the mechanics discussed here that takes into account expectations, see Flandreau (2002).

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the bimetallic economy is a small open economy, and that its exchange rates are hit full blast by movements in the gold–silver exchange ratio. When we look at the facts, we understand better how the French economy, through the agency of bullion and foreign exchange markets, stood at the monetary crossroads between the gold world and the silver world, and how it stabilized the international monetary system by gobbling up the global superabundance of gold.

4 Coin Memories: New Estimates of France's Specie Stock (1840–78) I was born in Paris on 3 April 1810, the day after Napoleon married Marie-Louise. The city was in festive mood. The sight of the new Napoleon, all happy and powerful, made it believe again, to quote the words of a noted historian, in the inﬁnite grandeur of France, as if it had doubted the fact. Upon leaving the Mint, I went into the Tuileries, into the special treasury of His Majesty Emperor and King. My early years ﬂowed by smoothly even in those troubled times …. Until 1850 (by then I was forty years old), I was sought after, doted upon … Every class of society, from M. de Rothschild down to the lowliest ploughman, made us welcome. They still do, I am told, in our countryside, now far away from me. One day, in 1857, I remember, I fell into the possession of our most implacable enemy, M. Michel Chevalier. I trembled with terror, fearing that he would thrust me away indignantly … But not at all. His furies against our race were entirely ofﬁcial. In private, he respected and acknowledged our qualities, merely adding that one day, perhaps soon, we would be heavily depreciated. But he has been for so long prophesying now on one side, now on the other. Philidor Goudvriendt (pseudonym of Jules Malou) Mémoires inédits d’une vieille pièce de 20 francs (1873) (Unpublished Memoirs of an Old 20-franc Gold Coin (1873)) In an economy that produces little or no precious metal, variations in the specie stock are by deﬁnition identical to net specie imports. In the light of the previous chapter, it would appear extremely important to quantify these variations, because this would enable us to study the monetary relations between France and the rest of the world. But this would require having a series with which to follow the annual progression of France's specie holdings. Unfortunately, such a series does not exist for the period of interest to us. As Saint-Marc (1983) writes, ‘We just do not have trustworthy statistics for judging the amount of bullion reserves before 1870, or even before 1878.’135 The deﬁciency can be remedied. To do so, this chapter resorts to information from annual minting series and a number of Enquêtes monétaires (Monetary Surveys) conducted by the Ministry of Finance from 1878 onwards. These elements, combined with an understanding of the logic of bimetallic arbitrage, will enable us to deduce the number of given coin types circulating at particular periods. The Monetary Surveys not

135

Saint-Marc (1974; 1983).

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LOGIC OF ARBITRAGE

only enlighten us on the survival through time of the different generations of coins, but they also bear very distinct traces of how the bimetallic system operated. It is as though the surveyed coins preserved the memory of their past. As we have seen, the changing commercial ratio between gold and silver was responsible for coinage and melting. It thus inﬂuenced specie birth and death rates. The link was identiﬁed in the previous chapter when we found a close connection between specie exports and the gold–silver price ratio. It can also be discerned in the mint runs. As Fig. 4.1 shows, the years in which a particular metal depreciated were (thanks to arbitrage) years of intensive coin-making. This fact makes it possible to track the changing state of French specie stocks. That is the goal of this chapter, which may be viewed as an essay in monetary demographics. Fig. 4.1.Commercial ratio and coin-minting (franc millions): upper part of y-axis—silver coinage, lower part of y-axis—gold coinage.

Source: Statistical Annexes.

1. ESTIMATING FRANCE'S SPECIE STOCK: FROM ART TO SCIENCE Two main approaches for assessing the quantity of specie in France in the nineteenth century may be found in the existing literature. One uses contemporary sources for

NEW ESTIMATES OF FRANCE'S SPECIE STOCK

77

attempting to glean some estimates. This method was adopted by historians who needed a quick view of the situation. The other method meets the need for a more systematic treatment, but is more capital-intensive in terms of the statistical apparatus involved—and also in terms of the assumptions it requires. Maurice Lévy-Leboyer (1977b), in his work on the evolution of the French monetary system, collected ﬁgures contained in documents of the time and used them to produce rough estimates of changes in specie stocks at ﬁveyearly intervals. Seeing that the question of whether France held adequate amounts of metallic coin was a subject of debate from as early as the 1830s, candidate sources for each period are easy to ﬁnd. The problem is that there are almost too many of them. The ﬁgures quoted at the time vary considerably, depending on the seriousness, astuteness, and imagination of their authors. Broadly speaking, contemporaries added together coinage returns and then discounted from these gross numbers the amounts which they thought had been melted down, exported, lost, etc. Out of this plethora of conjectures, Lévy-Leboyer was forced to make choices, whose principles he did not explain, leaving them open to doubt: the ﬁgures available for 1840, for instance, range from 2 to 4 billion.136 Lévy-Leboyer voted for 3.2 billion. We can trust his instinct, or we can try to ﬁnd a surer method.137 The origins of ‘scientiﬁcally’ estimating French specie holdings can be traced back to 1878. Research followed two main lines of approach, due to Alfred de Foville and René Pupin, respectively. Later, Jules Denuc extended their scope and proposed retropolations that went back to 1870. The trouble is that the two series are so different that neither can be taken seriously. Saint-Marc's solution (Saint-Marc 1983) for dealing with this problem was to take their average, which is obviously not acceptable. Yet both methods contain useful insights. Their chief merit is that they rely on explicit assumptions. A brief account of them will serve to introduce the technique described in this chapter.

2. FOVILLE'S METHOD Origins and Principles The work of French statistician Alfred de Foville has often been praised for its pioneering character at a time when statistical inference was still in its infancy. It is customary to present it as highly innovative.138 The truth however, is that this famous method was invented in England. Foville borrowed it straight from Stanley Jevons who, in 1868, had studied with the aid of several British banks a broad sample of sovereigns and

136

See Thuillier (1983), which also contains estimates for 1810 and for 1840.

137

A sort of consensus exists, however, as regards these ﬁve-yearly estimates. They are often quoted and follow the earlier ﬁgures put forward in 1967 by Rondo Cameron. According to Plessis, metallic currency is assumed to have risen from 3.5 billion in 1845 to 7 billion in 1870 and 7.4 billion in 1885.

138

See Foville, ‘{Le stock monétaire de la France}’ in Journal de la Société de Statistique de Paris, 1879, and La Monnaie, 1907. Traditional accounts of Foville's method may be found in Arnauné (1902), Denuc (1931–2), Saint-Marc (1983), and Sicsic (1989). According to Cameron,The estimates of specie in circulation, on the other hand, are probably better than for most other countries, including Britain. In the latter part of the nineteenth century the Ministry of Finance conducted a series of experiments, sampling the stocks of coin in public ofﬁces and the larger banks to determine their age and rate of survival. From the data obtained it is possible to estimate the total quantity of specie with a fair degree of accuracy.This quotation reveals how little the seminal article by Jevons (1868) is known, even in the English language literature.

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half-sovereigns in circulation. Using a statistical technique (which would come to be known in France as ‘Foville's method’), Jevons sought to determine from the sample the average age and quantity of specie in Great Britain. His ﬁndings were presented to the Royal Statistical Society in December 1868 and published the same year.139 At issue was the possible re-coinage of the British specie supply at a time when the world was considering global monetary uniﬁcation on a 25-franc gold coin basis. Since a freshly minted sovereign was worth about 25.22 francs but an old one could be worth much less, Jevons wished to provide data for calculating the cost of the reform.140 A few months before Jevons's conclusions came out, another monetary survey had been conducted in France. Like that of 1857 before, the primary purpose was to determine the proportions of gold and silver being used in payments (see Chapter 2). There too, people were debating the possibility of moving to gold monometallism, so that kowledge of how much silver was in circulation was important. The ﬁndings of the survey were not statistically processed, and the manner of data collection made them unﬁt for an application of Jevons's method.141 It was not until 1878 that Foville began supervising monetary surveys. These were carried out again in 1885, 1891, 1897, 1903, and 1909.142 Foville, in his different articles, seemed happy to ignore the contribution of the English economist—except in the one case where he spoke before the Royal Statistical Society. In his 1907 book, he wrote somewhat self-importantly: I have sought and found the basis of a less haphazard method of calculation in the monetary censuses which have become an excellent habit of our Finance Administration every six or seven years. A ﬁrst trial was held in 1868. Five other surveys were conducted in August 1878, May 1885, April 1891, September 1897 and October 1903. These are, of course, partial surveys only. But the contents of our 30,000 public treasuries and the others agreeing to join in the operation give a sufﬁciently exact image of our country's total circulation. The drill is everywhere the same: … to count the gold coins and the écus, classify them by share in the whole, country of origin, year of coining, date of issue, etc. This chronological classiﬁcation, once compared to annual minting

139

Jevons (1868: 426–464). For an account of Jevons's survey see Capie and Webber (1984).

140

See Einaudi (2001) on the British debates regarding a universal currency.

141

The ﬁndings of the 1868 survey are available in the Bibliothèque Nationale under the title Résumé de l’enquête faite auprès des trésoriers payeurs-généraux, Paris, Imprimerie Impériale, 1868. A fuller version may possibly exist, but it could also have been destroyed like many other documents in the ﬁre in the Ministry of Finance in 1871. In the Banque de France's archives, the folder Enquête Monétaire contains the results of a study (30 April 1868) of the Banque de France's reserves both in Paris and the branch banks. Here again, the ﬁgures deal only with the gold-to-silver structure of the reserves. A number of authors (like Saint-Marc) have confused the format of the 1868 survey with that of later ones. The 1868 survey does not, unfortunately, allow Foville's method to be applied. Furthermore, the count of the gold and silver coins was not systematic. The proportions of gold and silver deduced from the survey, which have been reproduced by nearly everyone (Soetbeer 1889; Lévy-Leboyer 1977b; Redish 1995), are therefore worthless. The fact is that Foville himself did nothing to clarify the question, often presenting the 1868 survey as belonging to the later set of surveys.

142

Foville (1907: 133–4).

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statistics, tells the practised mind to what extent the losses sustained by successive generations of coins have reduced the total stock. The most recent issues are likely to have remained almost intact. But not much is left of the older ones, especially when speculation, as was once the case for our [silver] écus, ﬁnds it advantageous to melt them down. All this may be calculated, at least approximately. Questions of paternity aside, the ‘Jevons–Foville’ method is worth describing. The ﬁrst idea is that the coins found at a given date in a number of treasuries may be considered as a sample of the total money stock. This granted, the coin stock may be approximated if the sample's relative size can be estimated. To this end, the coins are sorted according to their year of minting, or ‘vintage’. From there, it is possible to calculate the ‘survival ratio’ of each generation by matching the number of coins counted against the known number of coins originally issued. The survival ratio is the product of the survival rate (i.e. the fraction of the original minting that has survived up to the date of the survey) and the relative size of the sample. The latter is the ratio between the number of coins examined and the number of extant coins, to be determined. On the assumption that the most recent ‘vintages’ have survived without loss, the survival ratio for those years naturally makes it possible to deduce the relative size of the sample. As Foville explained it:143 The ﬁrst thing to do is, for each vintage, to divide the number of coins counted (n) by the number of coins originally struck (N). Expressed as a graph, the sequence of these annual fractions traces a curve (y = n/ N) which I shall call the comparative survival curve, since its oscillations measure the reduction in numbers, sometimes small, sometimes large, suffered by the different issues in the course of time … Let us assume for a moment that one of the many annual issues since 1798 has remained intact in the circulation … If the fraction n/N for this charmed vintage amounts to 5/1000, say, this would mean that the survey has covered two-hundredths of the coins of this age in circulation in France, since the number of these coins (E) is assumed as being equal to the number of coins minted (N). This gives,

If this is the ratio between the number of coins extant and the number of coins counted in the survey for a particular vintage, the same proportion holds good for any other vintage, since the survey sample was drawn randomly from a perfectly homogeneous mixture. All that has to be done then is to multiply the number of French coins found in the public treasuries by 200 to obtain the total number of French coins circulating in the country. You can see that the arithmetic is really very simple.

A statistical criticism This method runs up against some arithmetic objections, though. To make this clear, let us call λ the size of the sample as a fraction of the total coin population. On the assumption that all the coins from the most recent generations are still in circulation,

143

Foville (1886: 10–14).

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λ can be estimated by dividing the number of coins belonging to these generations found in the public treasuries by the total number of coins issued. Let n be the (random) number of ‘recent’ coins found and N the number of these coins originally struck. The survival ratio f is thus an efﬁcient estimator of λ.

The census method consists in then approximating total circulation M by dividing the size of the sample (m) by f. But a well known statistical property (Jensen's inequality) shows that doing this tends to overvalue the true amount of money in circulation.144 For:

Provided that the coins found in the public treasuries have been adequately selected (‘a perfectly homogeneous mixture’ dixit Foville), Jensen's inequality does not matter too much. The variance of the estimates will be very small and the bias negligible. M can in that case be adequately estimated. On the other hand, if the examination of the contents of a number of public treasuries raises sampling problems, the bias can be considerable. Contemporaries were aware of this: in 1868, Jevons himself remarked that the proportion of the vintages in the British sample depended on the place where the coins had been collected. Coins struck between 1861 and 1867 represented 48.4 per cent of the samples chosen in London, but only 28.7 per cent of the samples from northern Wales. Unless the ‘density’ of each region with respect to the aggregate sample is known, it is impossible to make allowance for geographic uncertainty. The ‘classic’ census method introduced its own dose of uncertainty.145 In illustrating this point, it is enlightening to compare the estimated size of the sample as measured in the 1878 survey with the ﬁndings of a survey conducted the same year in Belgium, where French currency was also circulating as a result of the Latin monetary union. Whereas, according to the French survey, the relative size of the sample was 2.90‰ for gold and 1.55‰ for silver, the corresponding ﬁgures for the Belgian survey were 2.45 and 0.08‰. Depending on where the samples were drawn, the calculations of specie stocks could be substantially different. Does that mean that the monetary surveys are useless? As Box 4.1 shows, it is in fact possible to go beyond these seemingly discouraging conclusions and show that, provided that some caveats are respected, the information from the monetary surveys can actually be relied upon. If it is assumed that regional

144

Common sense tells us that the average of the inversions is greater than the inversion of the average.

145

This is, of course, a very common difﬁculty. McCloskey (1985: 160) writes, for example, ‘What we might call “passive sampling” involves some metaphysics … If the sample is given and not taken, literally data instead of capita, the statistician must wave a magic wand over the sample and declare it to be random.’

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heterogeneity has no inﬂuence, the distribution of vintages in the two samples should be ‘alike’. A test does show, in fact, that there are strong regional discrepancies. This does not, paradoxically, mean that the two surveys give a profoundly different image of the French monies. A simple regression analysis shows that both samples show strong afﬁnities. Indeed, over 99 per cent of the variance in the French sample can be explained by the returns from the Belgian sample. Even though from a strictly statistical point of view the two surveys may differ substantially in certain years (so ruling out the Jevons–Foville method), they give reliable information on the actual state of the circulation, provided not too much importance is attached to a particular year (which is the main ﬂaw of the traditional census method). Conclusion: a more balanced use of the whole series of survival rates should be statistically safe.

3. OTHER METHODS, OTHER PROBLEMS Another method for estimating the currency stock at a given date is to assess directly the proportion of each vintage that has been lost. This was the technique proposed by Pupin (1917). On the assumption that coins disappear at a constant rate as a result of accidental loss, wear, re-coinage, etc., Pupin estimated the French specie stock as it stood at each census date. The loss rate was arbitrarily set at 0.5 per cent per year. It is possible to reach a better assessment of the loss rate by combining the Foville and the Pupin methods; this requires using the Monetary Surveys to work out the rate. All that is needed is a binomial model (which assumes that a constant fraction of each vintage is lost each year) to interpret the Survey returns. Stanley Jevons explicity developed the theory behind this approach in his article but only to reject it.146 So did Foville, more implicitly. It was revived by Sicsic (1989), who concluded that the resulting loss rate estimates were much higher than those proposed by Pupin. An attempt to generalize the methods of Pupin and Foville was made by Jules Denuc (1931–2). He tried to combine the loss rate with coin-minting ﬁgures so as to retropolate Pupin's series back to 1870. Again the validity of this approach depends to a crucial extent on the assumption of a constant coin mortality rate. Denuc also sought to retropolate Foville's series, using specie import and export data. The chief difﬁculty here is the poor quality of the series. While most contemporary statistics are bad, these are reputedly worse. They are the subject of Morgenstern's classic criticism (1965) of ofﬁcial statistics. Bullion dealers tended to under-declare their shipments to the customs authorities, not so much to hoodwink the government (bullion transfers were generally

146

Jevons actually used the constant depreciation rate model in order to reject the assumption of a constant loss coefﬁcient.The curve [of the survival rates] would have the form arising from a geometrical series and would tend constantly upward without any contrary bends … Suppose a be the quantity of coins issued in any given year, and that (1/ m)th part of the circulation be indifferently withdrawn every year; then at the end of n years, the quantity a will be evidently reduced to a(1 − (1/m))n.Jevons concluded by saying that the shape of the survival curve for British sovereigns contradicted this model. The same can be said of écus and napoléons.

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unrestricted and tax-free) as to shroud their operations in secrecy, discretion being the best way of protecting themselves.147 On the other hand, the consistency, already remarked in the previous chapter, between movements of the gold–silver price ratio and reported bullion ﬂows suggest that ofﬁcial statistics are probably much more reliable than Morgenstern makes out. A possible solution, it has been suggested, would be to consider that the rate of underdeclaration remained stable over a given period, and to apply a suitable correction factor148. Obviously, such a coefﬁcient would not be easy to determine.149

Box 4.1 What do the monetary surveys tell us? Figures A and B give the proportion of coins from each vintage in the French sample (black line) and the Belgian sample (grey line). The curves may be read in two ways. The ﬁrst is to decide whether the two distributions could possibly have been drawn from the same population. This possibility can be checked using a χ2 test, which leads to rejecting the null hypothesis that the two samples come from the same population.

χ2 tests tend, however, to reject the null hypothesis of identical distribution when the sample size is increased. They become highly discriminatory no matter how slight the differences may be. Provided that the sample is large enough, there is always a cut-off point at which the test rejects the null hypothesis of identical distributions. A second reading then is to decide whether this conclusion implies that the information in each sample is fundamentally different. To solve this problem, we suggest regressing the proportions from the French sample on those from the Belgian one so as to determine the extent of the two populations’ dissimilarities. This is done by regressing the survival rate series of the French sample (fi) on to that of the Belgian sample (bi) and a constant. The results are:

Fig. ATwenty-francs gold coins (napoléons)

147

Without great enthusiasm, the 1857 Commission recommended sanctions against the metal-founders and a levy on silver exports. The latter was never put into effect. According to the reﬁner Dubois-Caplan (Enquête de 1870, Vol. 2: 43), his was the only business importuned.An arrest warrant was issued against me; my shops were invaded by the police; my books were conﬁscated; my activity was halted. The Prosecutor opened an investigation. But I had no problem in demonstrating the perfect legality of the dealings which I conducted (along with my fellow-reﬁners, who were not troubled by the police). The whole affair ended by being ofﬁcially shelved.Ramon (1929) mentions certain difﬁculties which the Rothschilds were supposed to have had with the Imperial police shortly after the outbreak of the Franco-Prussian War.

148

Along the same lines, see the suggestions made by Roulleau (1912).

149

As Cameron (1961: 525) writes, ‘the absence of any reliable evidence regarding … the undervaluation of exports, even that procedure is unwarranted.’

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83

Source: Statistical Annexes. Fig. BFive-francs silver coins (écus)

Source: Statistical Annexes. Share of each vintage in total sample: France vs Belgium

4. CURRENCY DEMOGRAPHICS: AGE AND GENERATION The key idea behind our method of calculation is to exploit more thoroughly than did Foville and his successors the information contained in the survival ratios. Figures 4.2(a, b) trace the development of the ratio (as deduced from the French Monetary Survey of 1878) for 20-franc napoléons and 5-franc écus across the relevant generations.150 Each ‘curve’ has its own features which are linked, among other things, to bimetallism's inﬂuence on the career of each currency 150

We have left out observations from years when, with coin-minting at a low ebb, Foville's ratio seems highly variable (see below and Appendix C). Low minting (associated with near-zero weighting in regression analysis, since we use Generalized Least Squares) entails extreme variability in survival rate estimates. Note also that, while we work with the 20-franc gold coin series, a series for the 10-franc coins minted under the Second Empire is available (see Flandreau 1995b).

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type. Two effects seem to coalesce. First, an age effect, portrayed by an upward trend in both curves. The more recent a vintage is, the higher its survival ﬁgure tends to be. Common sense tells us that, if the mortality rate remains constant, there will be fewer survivors among the old than among the young. Second, there is a generation effect, illustrated by a series of plateaux. Examples are the very low survival rates for silver currency prior to 1852 and for gold coin over the period 1875–6. These ‘accidents’ make sense in the light of our discussion of the logic of bimetallic arbitrage. The relatively low survival rate for silver coins struck before 1852 undoubtedly reﬂects the export of these coins as part of bimetallic arbitrages following the Gold Rush. Our method consists therefore in using the qualitative to ﬁnd the quantitative. By carefully modelling comparative survival rates from the chronology of the bimetallic system, we are able to measure the impact of certain events on France's specie stock.

Silver coin chronology 1795–1829: During these years international arbitrage was partly kept at bay (owing to the Continental System until 1815), and the gold–silver ratio remained stable (until 1820), before a premium on gold appeared (a possible consequence, after 1821, of Great Britain's return to gold). All these factors sustained the coining of silver. The écus minted, whether they came from melted Ancien Régime coins or from ingots, contained a small quantity (one or two thousandths) of gold which the reﬁning processes of the time were unable to extract. During the 1820s, the perfecting of certain techniques (such as the Poisat process) drawing on the latest discoveries in chemistry made it a paying proposition to withdraw this fraction of gold (Guy Thuillier puts the proﬁt at 0.7 per cent).151 It was also realized, circa 1830, that the assaying techniques hitherto employed tended to under-rate (by approximately four thousandths) the ﬁneness of silver coins.152 This news spread quickly and there was a

151

See Thuillier (1983), and Gille (1965: 379) et seq. See also Chapter 7 below.

152

See Darnis (1988) and Thuillier (1983). The French government was initially reluctant to divulge this information for fear of what the discovery's consequences might be. Great Britain, where the Royal Mint's administrators had, in liaison with their French counterparts, contributed to the experiments that brought the fact to light, was faced with the same problem. See Craig (1953).

NEW ESTIMATES OF FRANCE'S SPECIE STOCK

Fig. 4.2.Foville's ratio (per thousand): (a) 20-franc coins (b) 5-franc écus 28.1pcStatistical Annexes.

Source: Statistical Annexes.

85

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LOGIC OF ARBITRAGE

rush to re-melt pre-1830 coins. As can be seen from Fig. 4.2(b), the epidemic was of giant proportions. 1830–52: With a persistent tendency for gold marginally to appreciate, the minting preference went to silver. The situation would go into reverse during the next period, after 1852. Silver then started to appreciate and écus struck during the 1830s and 1840s were melted down and exported—a second epidemic, this time resulting from the arbitrage process. The result was the second plateau in Fig. 4.2(b) separated from the former one by a ‘cliff ’, as Foville put it. 1853–66: During these years when silver bars traded at a premium, it was primarily gold that was minted. Very few écus were coined. This produced sharp variations in Foville's ratio. Since gross original mintings were small, quite meagre differences in the number of coins counted give rise to large swings in estimated survival rates. For clarity, these years are excluded from the chart. It should also be added that the bimetallic arbitrages of the period 1853–66 took as their prime target the coins struck after 1830 (the Louis-Philippe écus, as the Rothschild archives call them). Coins from before 1830 still around in the early 1850s were in poor condition (otherwise they would have been melted in the 1830s). Their state of wear shielded them from the dealings of the arbitrageurs.153 1867–70: During these years, the premium on silver disappeared and the commercial ratio remained stable at or around the legal ratio. ‘Speculation’ on silver (as contemporaries called the arbitrages) stopped (Plessis 1985b: 120; Ramon 1929: 259). Gold and silver were coined together. 1871–2: The introduction of inconvertibility (cours forcé) in August 1870, France's defeat in the Franco-Prussian war, the 5 billion War Indemnity imposed on the young Republic and, not least, the move of several countries (including France) away from silver should by rights have seriously affected the French currency system from 1871 to 1878, the year in which convertibility was entirely restored. Yet the Indemnity and the cours forcé had smaller effects than expected. The suspension of payments by the Banque was accompanied by a sharp fall in coin-minting and a mild premium was paid on gold and silver. But, as early as at the end of 1873, the Banque resumed its payments in écus. The transfer to Germany was ﬁnanced with the Thiers Rente, which met with great success not only in France but also abroad. It helped to spread the adjustment over several years and the use of ﬁnancial instuments to perform the operation meant that little actual coin was needed. At the same time, the transfer of wealth towards Germany resulted in huge trade deﬁcits across the Rhine in France's favour. According to Machlup's calculations, at least half the transfer was achieved in this

153

Letters in the Rothschild gold and silver market correspondence mention shipments of écus divided into three categories: New (1848 onwards), Louis-Philippe (1830–1848), Old (pre-1830). The latter, occasional category refers to gold-containing écus, or écus dorés. Arbitrage on pre-1830 coins, however, was rare for the reasons described in the text, and we shall therefore ignore it.

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way.154 ‘The rest … was paid temporarily through imports of foreign capital, backﬂows of French capital from abroad’, and in some measure, ‘gold and currency exports’.155 Five hundred million in gold and silver coin (half in each metal) were taken directly from the Banque de France's reserves for dispatch to Germany. In Germany, the French coin piling up in the German banks was given preference for paying for imports. According to Ramon (1929), the result was that the barrels of 5-franc coins that the Banque had sent to the other side of the Rhine were coming back to France without even having been opened.156 1873–8: The decision to restrict the coining of silver was a severe blow to the running of the bimetallic system. Arbitrageurs had to factor long delays into their costs and refused to buy silver for coinage unless they could rebank the coins with the Banque de France. Agents also worried about the value of their coins, fearing that silver would be completely demonetized. The result was that large quantities of écus accumulated in the bank's vaults (see Foville 1879; Ramon 1929, and Chapter 8).

Gold coin chronology 1803–20: The commercial ratio had, during the Napoleonic Wars, only a limited effect on coin-minting. Until 1815, much of the minting was done at the behest of the Imperial regime drawing on the taxes collected in the occupied lands. After the fall of the Empire, the gold–silver price ratio went through 5 years of stability, close to 15.5, and had little effect on mint output. 1821–47: After 1820, a long period of gold appreciation began. Gold was coined only on the few occasions when its price showed signs of falling. During these thirty-odd years, the average price of gold with respect to silver remained above the 15.5 ratio. As was noted in the case of silver from 1853 to 1866, the survival ratio for gold over these years was very unsteady owing to low mint output and high losses. 1848–70: All through this time, the gold mined in California and Australia invaded Europe. It was coined in France on a very large scale and began forming a substantial proportion of French currency. After 1865, the new mintings were channelled primarily into the Banque de France's reserves, which rose to a record level of one billion. This stock was later released in response to the difﬁculties surrounding the events of 1870. The survival rate was fairly high, stable, and tending to rise. There was a noticeable ‘dip’ in 1853, probably in conjunction with an unfavourable balance of payments and the related exceptional exports of gold (see Plessis 1985). 1871–3: Whereas silver losses attributable to the Indemnity and non-convertibility seem to have been negligible, the same cannot be said of gold. As numismatists know (see Gadoury 1989), 1871 coins are exceedingly rare, rarer in proportion than for other years (such as 1888) in which mint output was even lower. This fact was already in evidence

154

See Machlup (1964).

155

Ibid, p. 381.

156

Ramon (1929: 385).

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in the 1878 Survey (see Fig. 4.2(a)). In 1872 and 1873, when gold was at a premium, not a single gold coin was struck. 1874–5: In 1874, the Banque de France began redeeming its notes in 10-franc gold coins and the premium on gold disappeared. These being the years of Germany's deﬁcits, gold ﬂowed into France, allowing the Banque to replenish its reserves. As Fig. 4.2(a) shows, the ‘survival’ of 20-franc coins was lower for 1874 and 1875 than for the 3 years following. The reason was not losses, but the build up of reserves by the issuing authority.157 1876–8: During these years, the circulation of gold returned fully to normal. Payments in gold resumed completely and the Banque stopped ‘hoarding’.

5. THE MODEL The qualitative model outlined here enables the impact of the various events described above to be quantiﬁed. Statistically, the model is designed to estimate the losses sustained by each generation i. Letting a(i) be the proportion of vintage i that is lost, we obtain by deﬁnition:

In line with what was suggested earlier, the aim is to break a(i) down into two ‘effects’. The ‘age effect’ is modelled as an increasing function of time, knowing that the probability of ‘losing’ (through wear and tear, etc.) a given coin is ρ per annum. After 1 year, out of 100 coins issued (1−ρ) × 100 will survive. After 10 years, only 100 × (1− 10ρ) (if ρ is small) will not have been lost. The ‘generation effect’ is the set of events which have affected vintage i. Expressed formally, k(i, j) is the impact of event j (e.g. the remelting of gold-bearing écus) on year i (in 1878, for example, k(i, j) = 0). Letting ω(i) be a random term with mean zero, we obtain:158

Technically, identiﬁcation of the model's parameters requires us to deﬁne, for each type of currency, a reference period, that is, a generation of coins that did not experience exceptional losses.159 This could be interpreted as being a generalized form of Foville's hypothesis, since the survival rate for that generation (adjusted for normal losses) equals the relative size of the sample. Our formula is less restrictive, however, for there is no

157

This was quite normal practice. Jevons had noted that the share of the vintages was proportionately greater in the Bank of England's reserves than in circulation. Banks of issue were naturally leading takers of mint output.

158

T is the date of the survey. The full derivation of the formula is given in Appendix C.

159

Appendix C develops the relation between this constraint and Foville's hypothesis.

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need to posit that the vintage is entirely loss-free. French monetary history does, in fact, supply examples of such reference periods. In the case of silver, it is the period 1866–70, after silver exports came to a halt and before agents began returning the new silver issues to the Bank. In the case of gold, the reference period is 1876–8, that is, the period of the de facto return to gold convertibility, after the years of hoarding by the Bank (1873–5). With the chronology established, as many events affecting circulation as it suggests may be included in the model. The most comprehensive form is tried ﬁrst. It is then easy gradually to trim the model by eliminating statistically irrelevant effects. The model then reaches its ﬁnal ‘stripped down’ form. Its results are summarized in Tables 4.1 and 4.2. Table 4.1. Silver: R2 = 0.99; Durbin–Watson = 1.7; Number of observations = 81 Variable

Estimated coefﬁcient Standard deviation

T-statistic

λ Time 1795–1829 1830–52 1853−66 1873−78

0.32 × 10−2 −0.47 × 10−5 −0.27 × 10−2 −0.20 × 10−2 −0.25 × 10−2 −0.19 × 10−2

20.7 −2.5 −14.2 −11.4 −12.3 −9.9

0.16 0.19 0.19 0.18 0.20 0.19

× × × × × ×

10−3 10−5 10−3 10−3 10−3 10−3

Estimated effect (% losses) ρ k k k k

= 0.15 (1795−1829) = 84 (1830−52) = 63 (1853−66) = 79 (1873−8) = 59

Source: Author's calculations.

Table 4.2. Gold: R2 = 0.99; Durbin–Watson = 2.27; Number of observations = 73 Variable

Estimated coefﬁcient Standard deviation

T-statistic

λ Time 1821–47 1853 1866–70 1871 1874–5

0.24 × 10−2 −0.27 × 10−4 −0.46 × 10−3 −0.94 × 10−3 −0.18 × 10−3 −0.15 × 10−2 −0.18 × 10−2

38.1 −12.5 −2.8 −5.93 −1.16 −4.26 −12.4

0.62 0.21 0.16 0.16 0.16 0.36 0.15

× × × × × × ×

10−4 10−5 10−3 10−3 10−3 10−3 10−3

Estimated effect (% losses) ρ k k k k k

= 1.1 (1821.47) = 19 (1853) = 40 (1866.70) = 8 (1871) = 63 (1874.5) = 77

Source: Author's calculations.

The most salient feature of the results is the heavy impact of exceptional losses. The reﬁning of gold-containing écus sapped 84 per cent of the coins struck before 1830 from circulation. The premium that affected silver after 1853 led to the export of 63 per cent of the coins struck from 1830 to 1852 and 79 per cent of those minted from 1853 to 1866. At the close of the period, almost 60 per cent of newly minted écus were sent to the Banque de France.

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As for gold, the tendency to appreciate in the period 1821–47 was responsible for a 20 per cent loss on the coins minted during those years. Losses on previous mintings were probably limited, however, as they cannot be distinguished from normal losses. The losses attached to payment of the war indemnity appear quite small, and in any case limited to one single vintage. While 65 per cent of the 1871 mint output was destroyed, earlier vintages were little affected. Only 8 per cent of the 1866–70 issues can be identiﬁed as having disappeared.160 That means that, even if napoléons temporarily left the circulation between 1871 and 1873, they were not melted down. They were rather hoarded as speculative holdings and no doubt came back later. They could thus be counted as present in 1878.161 Lastly, the Banque de France's amassing of ‘treasure’ drained more than three-quarters (77 per cent) of the coins struck in 1874 and 1875 from circulation.162

6. NEW ESTIMATES OF FRENCH METALLIC CURRENCY, 1840–78 The ﬁgures contained in Tables 4.1 and 4.2 provide an estimate of the proportion of each vintage still extant in 1878. They make it possible to calculate directly the quantities that had survived. The metallic circulation of 1878 can therefore be obtained by multiplying the initial mintings by the proportion of coin having survived. The results are very different from the ﬁgures advanced by Foville and Pupin. Whereas they found 5 billion (Foville) and 9 billion (Pupin) for gold, and respectively 2.9 and 5 billion for silver, we ﬁnd 6 billion for gold and 1.4 billion for silver. Our results, quite interestingly, come within 10 per cent of those reached by Sicsic (1989), namely 6.5 billion for gold and 1.6 billion for silver.163 But the merits of the model do not stop there, for it also enables us to calculate the amount of specie in circulation at certain key moments when it is known that nothing exceptional was occurring. It is possible, for example, to estimate the silver stock in 1840 when the reﬁning of gold-containing silver coin began to slow for lack of écus in good enough condition. The arithmetic involves simply subtracting natural and remelting losses from the original issues. Similarly, the silver stock in 1867 (when silver melting calmed down) or the gold stock in 1820 and 1848 (at the beginning and end of the period of gold's relative appreciation) can be estimated.

160

As Table 4.2 shows, the T-statistic is a bit low. We performed the same regression on the sample from the 1885 Enquête Monétaire and found a comparable, but this time appreciable, effect. We therefore preferred to keep the coefﬁcient measured from the 1878 sample.

161

The Rothschild Archives seem to bolster this view. Beginning in 1873, they mention several operations for repatriating French gold from London. This raises an interesting point, which is the distinction between location and ownership. It is thus quite possible that the shipments of gold abroad observed in the early 1870s did not necessarily signify a reduction in ‘domestic’ holdings. Because of the war, gold was put into safe keeping abroad but continued to belong to the French.

162

This ﬁgure seems consonant with a note found in the Banque de France archives. At the time of the 1878 Survey, the bank's reserves held 500 million in gold coins struck from 1874 to 1878. As the reserves totalled 1.2 billion in gold, or 20% of a circulation estimated at 6 billion (see below), one would expect to ﬁnd in the reserves 20% of the mintings from the period 1874–8, plus 77% of the 1874 and 1875 vintages, corresponding to the hoarding in those years. On the basis of these ﬁgures, about 400 million in 20-franc coins minted from 1874 to 1878 would have been sleeping in the bank's vaults. This is very close to the 500 million reported in the note (Folder Enquêtes monétaires, Banque de France archives).

163

The similarity is easy to explain. Sicsic's method can be reinterpreted as a constrained version of our model, in which the effects of exceptional losses have been ignored and only age effects (‘normal losses’) have been retained. A test on the constraint implied by Sicsic leads to a rejection of his speciﬁcation. His coefﬁcient of coin mortality is biased because it includes the effect of the exceptional effects along with ‘normal’ losses. On the other hand, the amount of coins still in circulation is reasonably well estimated, precisely because the ‘normal losses’ coefﬁcient used to compute it captures all kinds of losses. See Appendix C.

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91

The trends in metallic stocks between two key moments can also be reconstructed. For each year considered, the aggregate stock of specie at the end of a given year is equal to its value at the end of the previous year, plus new mintings and minus normal and exceptional losses for the year in question. Normal annual losses are known, having been calculated. Exceptional losses, on the other hand, are known only from the overall effect of a particular event, and not from its annual incidence. But it is possible to break the global effect down into a series of annual effects, at least from 1840 onwards, for losses are associated with bimetallic arbitrage and can therefore be proxied using net specie ﬂows as indicators. All the parameters needed to reconstitute specie stock evolution are thus known or computable, so that the annual series describing the careers of gold and silver currency in France from 1840 to 1878 can be plotted. It is shown in Fig. 4.3. Fig. 4.3.France's specie supply

Source: Statistical Annexes. The ﬁgures customarily used to document France's metallic currency stocks portray a rising trend from 1840 to 1870 and, with the exception of slowdowns and losses in the early 1870s, a regular increase up to 1878. Our calculations, which have the advantage of offering a more detailed account of gold and silver currency variations, suggest a rather different story, in which four main phases may be distinguished. First of all, around 1840, France's specie stock was much smaller than is generally believed. France held approximately 2.3 billion in gold and silver coin, two-thirds only of the amount traditionally assigned (roughly 3 billion). Interestingly, our estimate leans in favour of the ﬁgure advanced by the reﬁner, Poisat, who suggested 2 billion. Being in the trade, he probably had inside knowledge of the consequences of remelting gold-bearing écus.164 During the 1840s, the stock of metallic currency grew at a rate of about 2.6 per cent per year, in line with the rate conventionally reported in the literature. In 1848, the quantity of specie in France still lay below 3 billion, appreciably less than the ﬁgures given by Lévy-Leboyer or Saint-Marc.165 The ﬁrst ﬁnds of gold in California marked the start of a new episode, in which the pace of specie accumulation accelerated. From 1848 to 1859, the metallic stock grew at an average annual rate of 9 per cent. By the end of the period, our new series overtakes traditional estimates. After 1860, there is another

164

These results seem to substantiate certain doubts expressed by Thuillier as to the commonly held idea that, from 1840 on, France held ‘excessive’ amounts of specie. Despite suggesting that the real ﬁgures were probably lower, he still opted for a value lying between 3.2 and 3.3 billion.

165

As already said, Saint-Marc's series (1870–8) is obtained by striking a mean between Pupin and Foville's respective estimates as processed by Denuc. She constructs the trend for the period 1840–70 by crude retropolation of the numbers so obtained.

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interruption. The accumulation of metallic currency slows again, in step, it may be noticed, with an observed slowdown in France's economy. Following 1870, the war and its associated problems resulted in the ﬁrst net reduction (much smaller than the one recounted by Lévy-Leboyer, but slightly greater than the one suggested by Saint-Marc) in France's specie holdings. Towards the end of the period, specie in France was back on its upward path. In late 1878, the country's gold and silver stocks totalled nearly 8 billion. Our most obvious conclusion is that the standard view, such as the one popularized by Rondo Cameron et al. (1967), of a centuries-old French tendency to over-accumulate gold and silver, needs to be seriously qualiﬁed. Table 4.3 compares changes in per capita specie holdings in France and Great Britain. It reveals that the two countries’ paths began diverging appreciably only in the 1850s. The late appearance of this trend is strange in that the conventional wisdom dates banking and ﬁnancial development in France from the ﬁrst years of the Second Empire, and that this development is usually associated with a reduction of the share of specie in the money supply. Table 4.3. Specie per capita (in francs) (circulation less central bank reserves) England France

1844 55 65

1855 67 108

1865 84 158

1875 110 171

Source: Statistical Annexes, Mitchell (1980) and Cameron et al. (1967).

The apparent paradox may perhaps be explained by the fact that nineteenth-century economic development, in France as elsewhere, went hand in hand with ‘monetization’, that is, a rising demand for money, in turn related to an expansion in trade and regional

NEW ESTIMATES OF FRANCE'S SPECIE STOCK

93

specialization of production.166 The growth of banking in France, although quantitatively strong in the 1850s, was conﬁned to a number of industrial areas in the north-eastern half of the country. Those early years of Napoleon III's rule were also marked by a sharp rise in farm prices and farm incomes.167 The natural consequence was increased demand for money in the countryside. The demand could not be satisﬁed by bank-produced means of payment, since the banking network in country areas was rudimentary or non-existent. But metallic currency was readily accepted. As the rural areas were practically excluded from the ﬁnancial circuits, the specie they took in could not be recycled. The consequence was that, during the 1850s, metallic currency stocks grew considerably despite the development of the banking sector. The banking system was caught napping by the Gold Rush. The divergence between France and Great Britain after 1850 does not reﬂect any deep change in the way the French economy behaved. It was rather the arithmetical consequence of the surge in gold production. Given France's stronger propensity to hold specie, it was quite natural for it to absorb a higher proportion of gold than the other economies. Perhaps the myth of the ‘treasure under the mattress’ has its origins here. Figure 4.4 shows how the gold–silver breakdown of France's metallic stock evolved with the passage of time. It exhibits a ‘scissor’ pattern in which the double standard's inﬂuence can be readily discerned. In times of gold appreciation (as until the late 1840s), France's gold stock tended to shrink and its silver stock tended to swell, in line with the logic of bimetallic arbitrages. After 1848, the depreciation of gold reversed the process. Gold came in and silver went out. From 1853 to 1860, the trend was in full swing; it then slowed and ﬁnally stopped around 1866, while the commercial ratio stabilized. About one billion in silver, a very large sum, still remained in France. It would probably have been enough to drive many more arbitrage operations if the need had arisen, as will later be argued. After several years of stability in the ratio (during which both metals ﬂowed into France), the trend reversed once more and silver, especially from 1872 onwards, again started replacing gold. In 1873, however, restrictions were imposed on the minting of

166

See the theories of Knut Wicksell, reused by Jonung (1978), Saint-Marc (1983), and Bordo and Jonung (1981).

167

This improvement in interregional terms of trade is obviously consistent with the regional metal ﬂows analysed in Chapter 2. The need to absorb gold caused the metal to ﬂow into the interior of the country. The terms of trade changes may be thought of as the mechanism through which this adjustment occurred.

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silver, hampering the substitution process and preventing the commercial ratio from stabilizing close to the legal ratio. From 1840 to 1873, then, the changes in the structure of France's specie stock were clearly geared to variations in the relative prices of the two metals. Those changes were the ‘steering-wheel’ that enabled the gold–silver exchange ratio to stay on course.168 Fig. 4.4.Money supply and Gresham's law (franc billions)

Source: Statistical Annexes.

168

For a contemporary account, see Rouland's testimony (Enquête sur la Question Monétaire—‘the 1870 Enquiry’—Vol. 1, 1872: 84–5).The 1869 Commission was wrong in stating that the depreciated metal was further depreciated by competition from the other metal serving as currency. Yet once more, a close study of known crises always shows us a metal in strong demand. It thus departs gradually and, as it does so, the depreciated metal ﬁnds its job and usefulness again, and its price rises. No competition is possible between the metal that departs, because it is very dear elsewhere, and the metal that stays and takes over the circulation. Quite the opposite: one is for abroad, the other is for home. The one which leaves, but steadily, instead of accentuating by its competition the devaluation of the one remaining, prevents its devaluation, just as a buffer softens the shock of a collision. It does not allow the originally less preferred metal to ﬂood roaringly into the circulation via the conduits through which it enters as the other one withdraws.

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95

7. CONCLUSION In conclusion to this chapter, we should point out that, as Fig. 4.4 suggests, the substitution of one metal by the other was not a process in which one unit was melted for one unit coined. During the 1840s, inﬂows of silver exceeded outﬂows of gold. Likewise, in the 1850s and 1860s, about two billion in silver was exported while roughly ﬁve billion in gold was imported. In other words, at least three billion entered France not as a result of direct bimetallic arbitrages but as the product of other transactions with the rest of the world. The development of France's specie stock was subjected to several inﬂuences. While it reacted on the one hand to international pressures connected with stabilizing the gold–silver ratio on the different markets, it was also driven by domestic factors, and in the ﬁnal analysis by domestic money demand. Examination of the quantities fully conﬁrms, at this stage, the conclusions drawn in the earlier chapters from our study of prices. With these ﬁndings and the evidence gathered in the previous chapters we are now in a position to move on to a more complete account of the macroeconomics of bimetallism. But before we do this, we need to reach a better understanding of the microeconomic logic of the actions of private agents and public authorities in the operation of bimetallism. This is the topic to which we now turn.

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II Policy and Prot: The Microeconomics of Bimetallism

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5 The Rules of the Bimetallic Game France's ability to rely alternately or simultaneously on two metals has enabled it not only to use one or the other according to circumstance and offset the impact of their over-scarcity but also to come to the aid, not without proﬁt to itself, of those of its neighbours which were lacking in either gold or silver. The Banque de France, as a vast reservoir of specie, has managed to satisfy the demands addressed to it from many sides. This situation, of equal beneﬁt to all, could be maintained for as long as the coining of silver was not restricted … Denormandie, Governor of the Banque de France (Minutes of the 1881 Monetary Conference: 216) Much of the controversies over the Gold Standard revolves over whether it was a self-regulating system, that is, ruled by the market only, or a managed system, that is, operated by the action of the ‘monetary authorities’—usually the central banks. The controversy has also bred much confusion. Following Sayers’ classic text (Sayers 1936), it has commonly been thought that central bank interventions were the sign of management. This view was further ingrained in the literature by Bloomﬁeld's study (Bloomﬁeld 1959) which underlined the lack of automaticity in the behaviour of pre-1914 central banks.169 A case could be made, however, that this way of looking at things is not entirely appropriate. Any monetary system admits a measure of leeway which public authorities never fail to identify and exploit. The whole question, however, is not whether the central authorities did a number of things that were not entirely in line with the spirit of the system's rules, but whether these rules truly restricted the amount of tampering that could be committed.170 As regards bimetallism, our study of the bullion points in London and Paris shows that exchange rate and bullion price movements on the two markets were the automatic response to the need for balancing the commercial ratio on several markets at once. This argument is a clear plea in favour of seeing the double standard as a self-regulating system. We shall now go into greater detail, and examine the Banque de France's bullion policy from 1840 to 1870. Speciﬁcally, we should like to shed more light on the respective roles exercised in the working of the bimetallic system by the market mechanism (i.e. private arbitrage) and the Banque's dealings.

169

For a recent survey of these matters, see Eichengreen and Flandreau (1997).

170

Associated with this matter of ‘discretion’ versus ‘rules’ in the operation of the Gold Standard is the debate on central bank cooperation. The controversy was opened by Eichengreen (1992a) who claimed that the Gold Standard rested on international cooperation among leading central banks. A contrarian view using evidence on which this chapter draws is Flandreau (1996b).

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For the people of the day, as for modern historians, the relation between the Banque de France and the bullion market is very much a question-mark, especially when measured against the relative simplicity, already discussed, of the Bank of England's operations. The Bank of England was required to honour its notes with gold. Under the provisions of the Peel Act, it was required to buy gold ingots for 3£ 17s 9d per ounce. During the period which concerns us, it usually sold these ingots for 3£ 17s 10 1/2d.171 These slender but rigid margins (1.6‰ only between the buying and selling price) made the Bank of England the market-maker for gold in London.172 On the other side of the Channel, things were very different. Although the Banque de France was early on given the right to deal in bullion,173 the guiding principles of its action under the bimetallic regime are murky. Plessis's account of their historical evolution (1985b) leaves the reader with the feeling that it was very much a case of seat-of-the-pants navigation combined with a large dose of unreasoned choice or opportunism. ‘The Banque de France authorities’, he writes, about the 1850s, ‘have for a long time remained perplex … and hesitated on the proper course of action’ (1985: 123). As Plessis describes, the Banque could buy and sell bullion intermittently and at varying prices. It was fully entitled to determine the metal it would use for payments. It could redeem its notes and settle discounts in gold coin, silver coin, or both together. There were often differences in the bullion used in Paris and in the provincial branch banks. While he suggests that underlying arbitrages played an important role in shaping the Banque's policies, Plessis does not explain precisely how. In the 1860s, this appearance of unilateral (critics said ‘autocratic’) behaviour focalized the antagonism between the Banque and an economic lobby that included the partisans of the Gold Standard.174 The Banque's attitude was stigmatized as a refusal to serve the public good, and thus as a failure to perform its mission. During the 1868 enquiry, for example, one Chamber of Commerce declared in favour of monometallism because ‘it would save us once and for all from the invasions of [depreciated metal] which the

171

Subsequently, after 1870, the diminution in gold surpluses made gold relatively scarce. The Bank therefore began cutting down its ‘free’ transfers of gold. By paying in worn sovereigns, it could raise the gold export point, essentially selling gold at a premium (which could not, of course, exceed the cost of melting the worn sovereigns and selling the proceeds as commodity). See Ofﬁcer (1986).

172

Shrigley (1935) quotes the text of the 1844 Act (p. 44):Be it enacted that … all Persons shall be entitled to demand from the issue department of the Bank of England Notes in exchange for Gold Bullion, at the Rate of Three Pounds Seventeen Shillings and Ninepence per Ounce of Standard Gold: Provided always, that the Said Governor and Company shall in all Cases be entitled to require such Gold Bullion to be melted and assayed by Persons approved by the said Governor and Company, at the Expense of the Parties tendering such Gold Bullion.As Craig (1953: 308–9) points out, the halt in immediate deliveries to the London Mint in 1820 made it more proﬁtable for bearers of metal to turn to the Bank of England, which bought gold at varying prices (four or ﬁve pence below the mint yield of 3£ 17s 10 1/2d). In 1828, the Rothschilds, ﬁnding the Bank's terms too unrewarding, decided to send their metal directly to the Royal Mint. The Bank riposted by hiking its buying price from 3£ 17s 6d to 3£ 17s 9d. This price was ofﬁcialized by the 1844 Act.

173

Under the provisions of the Act of 24 Germinal An XI, the only ‘trade’ open to the Banque was that in gold and silver.

174

See Chapter 8.

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101

Banque visits upon us every so often.’ The Banque was, in sum, accused of using the double standard for its own beneﬁt and at the public's expense. As if to further confuse researchers, the Banque's own position regarding bimetallism was not entirely clear-cut. Willis (1901), writing about the period before 1870, maintained that the Banque had lent its backing to the system. This is only partly true. During the 1850s, the Banque de France presented itself in ofﬁcial discussions as a victim of the double standard system, not as its friend.175 On several occasions, it pleaded with the Cabinet to take legislative steps to stop the gradual replacement of silver by gold (proposing, for example, a ban on silver exports).176 But in the 1860s, the Banque, under growing attack, began changing its tune. It was at this time that it devised the doctrine which would become its credo and to which historians (such as Willis and then many followers) refer as ‘the’ Banque's position. The Banque acknowledged that it indeed indisposed the public by imposing the metal used for payments, but assured that it did so for the beneﬁt of all: the ability to choose the metal of payment protected the reserves and so preserved convertibility. In the end, it claimed, everyone gained.177 In 1867, during the Currency Standard Commission's meeting to debate possible changes in the bimetallic system, the Banque sent a letter to Commission members summarizing the reasons for its attachment to the double standard. The letter argued that being able to settle payments in the metal of its choice had helped it to weather even the worst currency crises. If speculators took aim at one metal, the Banque could pay with the other, thereby protecting its reserves and the public's credit. ‘It is noteworthy,’ the letter ended, ‘that this currency regime, in force for 65 years, has

175

Some authors, such as Cottrell (1992: 224), have taken these mouthings far too literally:Terms such as ‘Parachute’ give the impression of a smooth transition, but this was not the case as the drain of ‘Treasure’ to the ‘East’ created difﬁculties for monetary management, especially by the Bank of France, resulting in four ofﬁcial inquiries between 1857 and 1868. … The policies, in particular the payment of a premium upon gold and from the mid-1860s sudden variations in its discount rate, adopted by the French proto-central bank, had an effect upon the Bank of England.

176

In 1856, for example, the Banque minted silver ingots from its reserves to make up for a rarefaction of small change. The measure was criticized by Regent Lafond who remarked that the operation lay outside the Banque's attributions. He said it was the Treasury's job to see that the right proportion of small change remained in circulation. The Governor replied that it was only after having ‘fruitlessly’ importuned the Treasury over a long time that the Banque had felt it should proceed with this operation for the sake of small coin circulation and the needs of tradespeople who were suffering from the shortage of change. The silver ingots, which had become rare and expensive, were shipped to India and China. The Treasury was more and more reluctant to make the necessary sacriﬁces. If the Banque had not stepped in, the needs in question would not have been met for a long time to come. The Council, while respecting the pertinence of M. Lafond's remarks, approved the operation on account of the special circumstances (Minutes of the General Council, 28 February 1856). Governor d’Argout told the 1857 Commission (Vol. 1: 26) that it had been ‘the Banque which had most keenly felt the effects’ of the substitution of gold for silver.

177

This attitude reminds us of the public good credo hatched up by the Banque de France in answer to the attacks against its discount rate policy to which it was subjected under the Second Empire. (See, for example, Kindleberger (1993: 112.))

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operated throughout all that time not only without adverse effects but to the country's great advantage, whether in the severest crises or in ordinary circumstances.’178 The Banque's Governor, Rouland, speaking before the 1870 Commission, returned to these ideas and developed them. There were people, he said, who wanted to impose on France a single standard and unbending rules, copied from Britain. But the existence of two standards rests on a usefulness borne out by experience. Britain's example is an unhappy one, and I prefer France, which with its double currency more easily parries the frequency and intensity of currency crises, to England, which with its single Gold Standard staggers under the weight of these crises and is often obliged to buy the silver (to pay for its imports from Asia) which it can obtain only by dint of much sacriﬁce.179 The fact was that the ﬁnancial crisis of 1866, in England, had left France unscathed. This debate carries echoes of the controversies over the Gold Standard rules of the game. The rules proponents hold that, under a Gold Standard, the central bank is under an obligation to tighten credit when reserves are low and ease it when they rise. Seen in that light, the Bank of France was, according to White (1933) and Bloomﬁeld (1959) accounts of the post 1880 period, the perfect trickster, using payments in silver when the public expected gold. By this so-called ‘gold device’, the Banque kept its (gold) reserves intact while avoiding having to change its bank rate. This, of course, was after 1880, long after bimetallism was dead. Yet the parallel between the bimetallic story and the Gold Standard story is striking. Could one possibly have preﬁgured the other? There are two distinct issues at stake here. The ﬁrst concerns what is meant by ‘rule’ in the context of the double standard. In the Banque's view, it was unfair to qualify its payment policy as ‘arbitrary’, for under France's bimetallic constitution (which was the only set of rules it recognized), it had, like any other agent, every right to decide which metal it would use to honour its debts.180 The second issue concerns the ‘success’ of that policy, something which has in fact never been discussed. The Banque claimed that the ‘ﬂexibility’ conferred on the management of payments by the double standard served to protect its reserves. But what was the truth of this claim? Did the payment policy really deliver all the advantages that, after 1865, the Banque publicly attributed to it?

178

Documents Relatifs à la Question Monétaire, 1867.

179

Enquête Sur la Question Monétaire (1872), Vol. I: 88. Rouland had also taken an important part in the 1869 Commission's discussions. The same argument was subsequently repeated ad nauseam. It was trotted out again in 1881 by Governor Denormandie (Conférence Monétaire Internationale, 1881: 216):In all the crises that have occurred at such different moments in history and in such diverse circumstances, the Banque de France has been less sorely tried than the Bank of England. Over forty-ﬁve years, from 1837 to 1881, the former changed its discount rate only one hundred times. The latter varied it on 292 occasions. It may safely be asserted that the French monetary system is not unconnected to this result.It should be added that, in the late 1860s, a number of British voices joined the chorus. Seyd's book, quoted earlier, contains a long apologia in favour of specie buying. He goes so far as to say that the specie purchases were the reason why France absorbed a larger stock of gold than its partners and concludes—a Keynesian before his time—that this was originally why France caught up economically with England during the years of the Second Empire.

180

See the memorandum addressed to the Branch Directors in July 1851: ‘Gold continues to arrive in France and then into the Banque's vaults in abundance. This is no embarrassment to the Banque, since at any moment it can give it in payment’, it being ‘legal currency’. (Quoted by Plessis (1985b: 123.))

THE RULES OF THE BIMETALLIC GAME

103

In an effort to clear up these questions, we consulted the Banque de France's archives with the hope of reconstructing its dealings on the bullion market. The exercise posed some problems, as the sources are sometimes incomplete. The bulk of the decisions concerning gold and silver were taken at the weekly meetings of the General Council (ConseilGénéral, the Banque's executive body). Its resolutions were in principle passed on to the Chief Cashier, who was the Banque's Mister Do-it, especially where over-the-counter transactions were concerned. The trouble is that, while the Minutes of the General Council still exist, the records of the Cash Ofﬁce have been lost.181 The archives hint of frequent inconsistencies between what the Council decided and what was really done, owing no doubt to the practical imperatives of metal handling as well as to administrative bumbling (some evidence of which survives).182 Market operations (direct bullion buying and selling) were conducted through high-level Paris bankers and were not always reported in detail, for reasons that will appear clear later.183 The boxes of archives nevertheless contain some choice material from which the basic picture can be pieced together.

1. RULES OF THE GAME, 1: THE BANQUE DE FRANCE'S RATIONAL PAYMENT POLICY Some economists (Eichengreen 1985; Roccas 1990) put forward the theory that behind the stability of the gold–silver ratio can be found ‘the readiness of the Banque de France, endowed with huge metallic reserves, to exchange gold against silver and vice versa at the ofﬁcial rate … thus insuring the relative stability of the relation between both metals’.184 This supposition is rather surprising in view of the declarations of the Banque quoted above, and superﬂuous, since we have shown how arbitrages could maintain the ratio. If we are to grasp the constraints that bimetallism laid upon the actions of the bank of issue, let us imagine for a second that the Banque was obliged to pay back its creditors (the bearers of notes) in the metal of their choice. What would have been the consequences?

181

Information supplied by Ms B. Maymard, Head Archivist, Banque de France, December 1992.

182

Also to be taken into account are possible ad hoc arrangements or favours granted by the Banque which have not always left traces in the records. A good example is this note, found in the Banque archives (Bullion Trade Folder): On 11 April 1848, a M. Detouche ‘having a trading house in a position to offer ingots to the Banque’ addressed a complaint to the Governor. He claimed to have presented the cash desk with an ingot which was accepted, a few days previously. The next day, when he tried to do the same thing, his ingot was refused. The Chief Cashier (M. de Crouzas) told him that what happened one day did not necessarily happen the next. Detouche's complaint was accepted and his second ingot was ﬁnally received.

183

In 1848, for example, the Banque bought bullion in London through the House of Rothschild. An internal memo states, ‘We do not ﬁnd in M. Joly's letter-book any letter from the Banque to M. or the House of Rothschild dealing with a metal transaction, and no document on the subject exists.’ (Banque de France archives). The House of Rothschild's records seem to have been better managed, as its archives do contain part of the correspondence with the Banque on this matter. In particular, there are letters from Vernes, who would again manage dealings with the Rothschilds in the 1850s (Archives Rothschild 132 AQ 122).

184

Roccas (1990: 26). Roccas, paper, ﬁrst circulated in English, is a careful and very well informed review of the literature. It is thus all the more so interesting that it does contain the popular mistake on the role of central banks in bimetallic regimes. Such belief is indeed common among best informed economic historians.

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Fig. 5.1.(a) Banque de France silver reserves and French gold in circulation (franc millions), (b) Banque de France gold reserves and French silver in circulation (franc millions)

Source: Statistical Annexes.

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105

As Figs. 5.1(a,b) show, the Banque de France's reserves over the period 1850–70 accounted for a fairly small proportion only of the country's specie balances. It could not therefore be sure of converting gold holdings into silver, and vice versa, on a permanent basis. If, for example, a number of agents suddenly took it into their heads to exchange their napoléons for écus (or the other way round) at the Banque's window, the Banque would very soon have run out of one of the two monies.185 What is more, newly mined bullion ﬂows, although relatively tiny compared to total French circulation (several billion francs, as against an annual bullion production worth a few hundred million), were quite large compared to the Banque de France's reserves. In the early 1850s, while the annual world gold output amounted to about 500 million francs, the Banque held no more than about 200 million francs worth of silver. If the Banque had been compliant enough to pay creditors in the metal they wanted, arbitrageurs would have been able to obtain it immediately in exchange for their notes and would have incurred only minimal remelting expenses. (Instead of that, they had to scour the streets of Paris, the provinces, and the countryside for the metal they needed for bimetallic arbitrages, at an ever-growing cost.) Since the corollary of such generosity would have been a certain lapse of time (the counterpart of the operation being remitting the depreciating metal, letting it be minted, and accepting it back into its reserves), the Banque risked seeing its reserves prematurely depleted, with a consequent threat to convertibility. The Banque could not on this account be forced to pay up in the metal requested by the market. It was precisely to avoid being ‘trapped’ by the market that it had to be authorized—again, like any other dealer—to play the bimetallic game, in which the debtor (in this case itself) unrestrictedly chooses the metal used for payment. The Banque de France's payment policy can thus be more appropriately regarded as the normal economic practice of a rational agent in a bimetallic system. The wish to settle debts with the least expensive metal leads people to compare the opportunity cost attached to the minting of each one. Account must therefore be taken not only of the market price of gold and silver but also of the expenses entailed in coining.186 An agent in Paris has to compare the cost of replacing his money balances (or purchasing power) according to whether he is using gold or silver. He has to pay the price of coining in addition to the price of the ingot. The ‘threshold of indifference’, that is, the value of the commercial ratio at which a dealer could equally well buy gold coin or silver coin for a given amount of purchasing power, is determined by computing the relative price of the two means of payment at their respective mint price. As from May 1849, the threshold stood at 15.58.187 If the commercial ratio matches this ﬁgure, dealers in

185

Friedman (1990a).

186

Since we focus on the practice of a dealer located in Paris, where he has a minting shop and a bullion market ‘under his nose’, there is no need to include transport costs. The formula does not apply to a dealer located out in the provinces. It is quite logical therefore to ﬁnd differences in the Banque's payment policies in Paris and in the provinces (i.e. at the Branch desks).

187

pg (or ps) being the price of one kilogram of gold (or of silver) on the bullion market, and cg (or cs) the price of coining gold (or silver) paid to the Mint. In practice, the price was paid as a deduction. The metal bearer received 3,100 francs less cg for a kilogram of gold (200 francs less cs for a kilogram of silver). An agent would therefore see no difference in using gold or silver provided pg/ps = (3,100 − cg)/(200 − cs). See Chapter 2 and the Annexes on coinage fees. The indifference ratio stood at 15.5869 from May 1849 to March 1854 and at 15.5833 from March 1854. For a discussion of bimetallic indifference curves see the statement of Feer-Herzog to the 1870 Monetary Commission (Enquête sur la Question Monétaire, Vol. I: 348):The practical expression results from the combination of minting costs with the legal ratio of the two metals’ prices. In order to ﬁnd it, account must be taken of the fact that, to mint a kilogram of silver, 1 franc 50 centimes must be spent, and to mint a kilogram of gold, the cost is 6 francs 70 centimes. When these two ﬁgures are combined with the price of a kilogram of reﬁned silver, and of a kilogram of reﬁned gold, respectively, the ratio resulting in practice from the law is not 15.5 but 15.58.

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Paris could be expected to pay in either metal or both. If the commercial ratio is higher than the threshold of indifference, however, there would be a comparative advantage in using silver only. And if the commercial ratio sinks below 15.58, the preference would go to gold. To discover whether the Banque indeed behaved like a ‘rational agent’, its payment policy must be checked against variations of the gold–silver ratio in Paris. Before we do this, however, it is perhaps worth noting a few technical details. The analysis will be restricted to the Banque's Paris payment policy, as this is the only one for which we have detailed information. Given the importance of the capital and the proximity of its bullion market, Paris payment policy was undoubtedly more relevant and sensitive than the rest. It is important to remember that the General Council met weekly, while actual payments at the Caisse were made daily. Since bullion was also traded and quoted on a daily basis, the commercial ratio could change more often than decisions were taken. The ‘Regents’, who represented the Banque's shareholders, refused to let the Governor, a government appointee, have total control over important decisions in the interval between two General Council meetings. Payments policy consequently suffered from a degree of short-term rigidity. This could cause problems, especially when the market was near or at the threshold of indifference. If that were the case, optimum payment strategy could alter in the course of the week. To remedy this problem, the Council set an upper limit (named ‘crédit’) on how much the Cashier could remit of the metal that was relatively scarcer in the reserves. Should this metal appreciate, the rule set a limit on the amount of the metal that the Banque risked surrendering to the public ‘by mistake’. If it was the other metal which appreciated, the greater quantity held in the reserves made it possible to ‘hold the fort’ until the Council's next meeting, which could always be convened in an emergency, something which never happened. Other difﬁculties had to do with handling bullion which, following a policy change, had to travel from the tellers to the strong-rooms. Under the circumstances, the Council's decisions could hardly be expected to respond in the instant to minor oscillations occurring around the threshold of indifference, unless these did not exceed one or two thousandths on either side. Customers trying to outfox the Banque had, in any case, themselves to reckon with certain expenses. Small variations were thus unlikely to affect which metal was used to redeem notes. In order to test the consistency of the Banque's behaviour, we focused on the period from January 1850 to December 1854. In part, this is because of the rich store of information available concerning those months. Since the ratio stayed close to 15.58,

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107

the General Council discussed Paris payment policy nearly every week, making it possible for us to follow the pattern of decisions. Furthermore, the period is of great interest for our purpose, since it enclosed a trend reversal, with the relative appreciation of gold gradually giving way on the Paris market to a relative appreciation of silver.188 We can thus trace how the Banque reacted to this change of situation. The abundance of information and the fact that it was a critical period are obviously not a coincidence. A summary of the decisions of the General Council (in chronological order) is set out in Table 5.1. Figure 5.2 shows the changes in the commercial ratio in relation to the threshold of indifference. It identiﬁes which metal was principally used for payment in Paris during each sub-period. The ﬁgure thus acts as an eyeball test of the rational behaviour model outlined above. It shows that the model for optimum payment under a bimetallic regime is conﬁrmed as accurate. Until the end of 1850, with the commercial ratio higher than 15.58, the Banque nearly always used silver for payments. From the beginning of 1854, on the other hand, when the ratio dropped well below the threshold of indifference, the Banque made most of its payments in gold. During the intervening period, the ratio hovered around 15.58 and payments were made in a mixture of metals, both together or now one and now the other. From December 1850 to April 1852, for example, it paid in gold and silver. Gold ‘credit lines’ of 2, 4, 10, then 5 million were opened to the Caisse, and the remittance level of gold was raised from 10,000 to 25,000 francs per person. During that time, the Banque could be said to have let its creditors choose the metal they wanted. In April 1852, the commercial ratio rose slightly above 15.58. The Banque suspended its payments in gold and, in line with the model's predictions, used silver instead. But at mid-year the commercial ratio went down again, signalling in principle a resumption of mixed payments. The Minutes reveal that the Banque would have liked to have taken advantage of this opportunity to build up its gold stocks. It therefore decided to continue hoarding gold and pay in silver. This does not at all contradict the model, except for November 1852, when a plunge in the commercial ratio below 15.58 should have dictated payments exclusively in gold. The Banque did, in fact, resume paying in gold early in 1853 and quickly stepped up the process. Late in the year, it began insisting on paying in gold, for at least a third of the amounts owed, and then, apparently in December, paid exclusively in gold.189 The Banque's strategy thus obeyed the logic of bimetallism, which was to settle debts in the metal whose opportunity cost was less. Its behaviour was anything but arbitrary. For it to have been so, proof would be needed that it could freely have followed another strategy. Every time it deviated from a policy of paying in the less expensive metal, it

188

The available data on the following years fully corroborate the conclusions concerning the period under study. We know that, after 1854, the Banque paid primarily in gold. In the late 1860s, the commercial ratio once again climbed into the vicinity of the threshold of indifference and the Banque resumed its mixed payments (Rouland, Enquête sur la Question Monétaire, Vol. I: 96 et seq. ). In 1870, when the ratio fell below 15.58, the Banque began paying in silver only (Paul Coq, ‘Réunions de la Société d’Economie Politique’, in Journal des Economistes, August 1870: 312–13).

189

According to Léon Faucher (1853) (see Table 5.1). Like Plessis (1985: 124), we could not ﬁnd any trace of this decision in the Minutes of the General Council. It may nonetheless be noted that Faucher's comments are perfectly consistent with the ratio. They are, moreover, supported by Ramon's assertions (1929).

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Table 5.1. Chronology of payments policy, from Minutes of the General Council 1850–4 Date 1850 January-November December 1851 January

February

March

April

May

June

July

August

September

General Council decision

Payments

In general, silver only is used for payment. 19.12: 2 million (francs) in gold will be delivered.

Silver only Gold and silver

2.1: The appropriation of 19.12. is conﬁrmed. 9.1: 1.3 million from the appropriation of 19.12 remains. Out of this sum, 1 million will be apportioned to the public, with a maximum of 10,000 francs per person. The remainder will serve to pay the dividend. 16.1: Vernes proposes restricting the use of gold to give the exact money (‘appoints’). Proposition rejected. 13.2: Approval for a new appropriation of 2 million (gold), with a maximum of 20,000 francs per person 27.2: Approval for 5 million in appropriations for paying the Treasury in gold. 6.3: Approval of a third appropriation of 2 million. Gold will be given for all payments of less than 200 francs. The measure applies also to Branches. 13.3: Fourth appropriation of 2 million in gold, with maximum of 20,000 francs. 20.3: Fifth appropriation, same terms. 27.3: Second appropriation for the Treasury, sixth for the public (same terms). 3.4: The last appropriation for the public is renewed at 2 million. 17.4: The appropriation is again brought up 2 million, but the limit per person is lowered to 10,000 francs. Suspension of gold deliveries to Branches. 24.4: Appropriation for the public renewed at 2 million in gold. 1.5: Appropriation renewed at 2 million. The Governor is authorized to bring this appropriation up to 2.5 million before the next sitting. 8.5: idem. 15.5: idem. 19.5: idem. 30.5: idem. 5.6: Appropriation of 4 million (public), 25,000 francs per person. 12.6: Appropriation for the public renewed at 4 million in gold. That for the Treasury renewed at 2 million in gold. 19.6: New appropriation, 4 million in gold, for the public. 26.6: 4 million in gold (public), 3 million in gold (Treasury). 1.7: New appropriation, 4 million in gold for the public. 17.7: 4 million in gold for the public, 3 million in gold for the Treasury. 24.7: 4 million in gold for the public. Report by Regent Legentil on Odier's proposal to increase payments in gold. The Council approves a new appropriation of 10 million for the issues. A part of the sum will be apportioned by the Governor among the Branches to be used for giving the exact money. The Council raises the maximum amount of gold to be given away for exact money in Paris from 200 to 500 francs. 7.8: Paris and Branches, new appropriation of 10 million in gold. 21.8: idem. 28.8: idem. 4.9: idem. 11.9: idem. 18.9: idem. 25.9: idem

Gold and silver

Gold and silver

Gold and silver

Gold and silver

Gold and silver

Gold and silver

Gold and silver

Gold and silver

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THE RULES OF THE BIMETALLIC GAME October

November

December

1852 January

February-March

April-December

1853 January

February

March-December

1854 January-December

2.10: idem. 9.10: idem. 16 and 23.10: idem, but a possible reduction in the quota is examined. 30.10: idem. 6.11: idem. 13.11: Appropriation in gold (public) lowered to 5 million. 20.11: Appropriation of 5 million in gold renewed. 27.11: idem. 3.12: Suspension of gold issues. 11.12: Resumption of payments in gold. New appropriation of 3 million. 18.12: idem. New appropriation of 1.5 million for the Treasury. 26.12: The appropriation for issues of gold to the public is brought up to 5 million.

Gold and silver

2.1: Appropriation renewed at 5 million. 8.1: idem. 22.1: Ban on sending gold to Branches lifted. Approval of an appropriation of 5 million for this purpose. 29.1: Appropriation renewed at 5 million (in gold). Conﬁrmation of the decision of 5 June 1851 setting the maximum issue per person at 25,000 francs. 5.2, 12.2, 19.2, 26.2, 4.3, 11.3, 18.3, and 25.3: At each Council meeting, the appropriation for gold issues to the public is renewed at 5 million. 2.4 and 8.4: Appropriation renewed at 5 million (gold). 15.4: Suspension of free-of-charge gold issues in Paris as in the Branches.

Gold and silver

20.1: The Council decides that small sums (notes and ‘appoints’) of less than 200 francs) can be paid in gold. 27.1: idem, but for sums of up to 500 francs. 3.2: Resumption of payments to the public in gold; new appropriation of 10 million, with 10,000 franc limit per person. 3.3: idem. 17.3: payments in gold intensiﬁed; permanent appropriation of 10 million. 24.3: limit per person raised to 25,000 francs. 12.5: limit per person raised to 100,000 francs. 17.11: all ‘appoints’ (up to 1,000 francs) paid in gold. December: The Banque requires that its payments be made up of at least one-third gold (Indépendance Belge, 2.12.1853). 29.12: The Council makes known that it will give at least a half-part of payments in gold. According to Faucher (1853), ‘By virtue of a recent Council decision, the Banque…henceforth reimburses in gold only.’

Mostly silver

In general, gold only is given in payment. Issues of silver are limited to small sums.

Gold and silver

Silver only Gold and silver

Gold and silver

Gold and silver Silver only

Gold and silver

Gold and silver

Mostly gold Silver restricted

Gold only

Source: Except where another reference is quoted, the information in this table is drawn from the General Council Minutes.

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depleted its reserves of whichever metal had been given out ‘in error’. The suggestion here is that dealers took immediate advantage of breaches of rational behaviour to arbitrate on the cheap. Notes were redeemed and the metal received was melted. In November 1852, for instance, we saw that the Banque continued paying exclusively in silver, even though the commercial ratio had dropped below 15.58. Its silver reserves tumbled by 50 million. Then again in the second half of 1853, the Banque reacted a fraction too slowly in completely halting its payments in silver. The result: a loss of roughly 150 million francs (Fig. 5.3). The Banque had no choice but to bend to the rules of bimetallism. If it did not, the public would have done the job for it, and at its expense.

2. RULES OF THE GAME, 2: RESERVES MANAGEMENT AND THE DOUBLE STANDARD Bimetallism's inﬂuence on the Banque's policies went further than that. The problem of managing the ﬂows of metal from its coffers was compounded by that of managing

THE RULES OF THE BIMETALLIC GAME

Fig. 5.2.Commercial ratio and metal used for payments

Source: Text and Statistical Annexes. Fig. 5.3.Silver reserves in Paris and the Banque de France's ‘errors’ (franc millions)

Source: Text and Statistical Annexes.

111

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the structure of its reserves. If the Banque had run short of the relatively cheaper metal, the need to preserve convertibility would have forced it to redeem its notes with the expensive one. The arbitrageurs would have lost no time making the most of this godsend and grabbing hold of this resource. In 1855, the Banque's stock of gold dwindled considerably, and the Banque was threatened with a situation of having to pay in silver when there was practically no silver left in Paris (Ramon 1929).190 A run was in the ofﬁng. In 1860, the same thing happened again. The Indépendance Belge, a newspaper with a good understanding of the Banque's operations and one which escaped French censorship, noted that, ‘The day the Banque de France is obliged to dig into its millions in silver, all the notes outstanding will immediately be tendered at its exchange windows by everyone in the bullion trade.’191 To counter this difﬁculty, the Banque had to channel the appreciating metal through the back door, and barter it for the other metal. It resorted to transactions with other ﬁnancial institutions. The best-known examples are its reserve swaps with other central banks. These have often been described, but their rationale has never been understood.192 In 1860, it swapped 50 million in silver for 50 million in gold with the Bank of England. It concluded similar contracts in 1861 with the Bank of Russia (31 million) and the Banca Nazionale (9 million).193 These operations, owing to their ‘political’ character, were not always a model of ﬂexibility. The Czar apparently opposed the deal with the Bank of Russia before giving his consent.194 These hitches wasted precious time, especially when the reserves were under threat, and gave foreign powers a lot of leverage. From this point of view, transactions with the large Paris banking houses were less fraught with uncertainty. They stayed within the family, so to speak, since the major bankers

190

The Banque seems to have been obliged to resume some payments in silver—which could not but aggravate the situation. As Ramon writes (1929: 260), ‘Since the Banque de France did most of its paying in the depreciated metal, the gold reserves fell to the point where the tellers were forced to give out silver …. This interruption in payments with gold risked, if it lasted, inspiring panic. In the eyes of the public, it clearly signiﬁed a depletion of the reserves.’ The ‘State of the Reserves’ published monthly in the Journal Ofﬁciel made no distinction between reserves in gold and reserves in silver. For as long as the speculators did not discover that the Banque was reduced to paying in the proportionately costlier metal, the secrecy served to protect it. For them, a payment in silver was a precious tip.

191

Quoted by Plessis (1985b: 242). See also Kindleberger (1993: 66).

192

The next examples deal with the period most closely studied (that is, the years following the gold ﬁnds in California). From as far back as 1825, transactions of this type seem to have existed. In that year, the Bank of England is known to have countered a paucity of gold in its reserves by swapping silver for Banque de France gold. Even back then, the operation was transacted through Rothschild Frères (see James’ statement at the Enquête sur les Principes et les Faits Généraux, as well as Viner (1937: 273), and Juglar (1889) ).

193

The Banca Nazionale had special status since the Italian government wanted it to be the Kingdom's central bank (Sanucci 1989). It was hence often referred to as the Bank of Italy. This explains (according to a letter from C. P. Kindleberger to the author, summer 1994) the inconsistencies in the information reported by Plessis (1985b) and Kindleberger (1993). The transaction with the Bank of Italy was carried out through Rothschild Frères. Plessis (1985b: 242) describes the operations on the strength of details found in Banque de France archives (folder Opérations avec Banques Etrangères ). Other details can be found in the folder MétauxPrécieux, sub-folder Opérations avec Banques Etrangères. Yet more, seen through the Rothschilds’ eyes, are contained in their correspondence (132 AQ 891 et seq. ).

194

Banque de France archives, folder Opérations avec Banques Etrangères. The deal with the Bank of Russia was to have gone through the Dutfoy, Kinen & Co. bank, known as Kinen.

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113

were often Regents.195 They were also more secretive (not a good thing for historians), being directly negotiated between the Governor and the bankers. We have discovered traces of them, however, in the Rothschild archives where several large swap operations beginning in the early 1860s are reported. The central bank exchanged silver to be collected in Paris at par (that is, at the legal exchange ratio) for gold provided by the Rothschilds. The Rothschilds were free to export the metal they received, while the Banque could readjust its reserves towards a gold-intensive balance.196 Clearly the Banque de France's operations for the management of the reserve, just like its payment policy, were well and truly dictated by the rules of the bimetallic game; they were not the result of erratic decisions and certainly not a means of protection. Just like the Banque had no choice but to pay out with the less expensive metal, it had to get rid, by the back door, of the appreciating metal in exchange for the depreciating one. In addition, it could be said to have been forced by the system to perform operations that incidentally helped to stabilize the ratio: for its interventions duly increased the demand for the depreciating metal and the supply of the appreciating one. In the end, the Banque, within the limit of its assets and in competition with the rest of the economy, shared in keeping the system on an even keel. As a matter of fact the reserve swaps typically brought a ﬁnancial proﬁt: they were thus nothing else than a bimetallic arbitrage. In conclusion, the sources of confusion as regards a proper interpretation of the conﬂict of interest set in motion by the mechanics of bimetallism should be becoming clear. On the one hand, the Banque's critics were disingenuous in arguing that the bank should not have been allowed to use the metal of its choice. This would have prevented the Banque from doing what anybody else could do. On the other hand, the Banque was not more honest when it ascribed its opportunistic tactics, not to the constraints weighing upon it, but to a sovereign and benign intelligence of beneﬁt to all.

3. RULES OF THE GAME, 3: SPECIE PURCHASES, MONETARY POLICY, AND BIMETALLISM We now know clearly why the central bank of a bimetallic system cannot be a market-maker for both metals at once: during periods of arbitrage (on which such a system ultimately rests), the Bank's reserves are exposed as a convenient source of supply of the ‘scarce’ currency. The Bank then vitally needs to set its selling-point as high as it deems ﬁt, or to suspend sales altogether, so as to divert speculators away from its coffers.197 This, of course, does not prevent it from dealing on the bullion market. In particular,

195

In a similar vein, Cottrell (1992) stresses the role of the Rothschilds’ personal ties with the Bank of England as an explanation for the 1848 operation. Yet the importance of such factors should not be exaggerated. In 1855, Charles Rothschild, on a mission to the Bank of England, failed in his task (see below).

196

See Archives Rothschild 132 AQ 891, letters of 17, 19, and 22 November, and 4 December 1862. In question were contracts signed at the request of Comte de Germiny, Governor of the Banque. The Rothschilds handed the gold over to the Strasbourg Mint and deposited the orders for it with the bank's Branch, which took in the newlyminted coins. The silver drawn from the Bank's vaults was collected in Paris by the Rothschilds.

197

This freedom of action carried with it an obligation, namely convertibility, which implicitly constrained the Banque to offer at least one of the metals for sale. If it repaid its notes with gold, the price of gold in Paris could not rise higher than the level at which it became proﬁtable to exchange the Banque's notes for napoléons and have them melted.

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Fig. 5.4.The Banque de France and the gold market (1848–70)

Source: Banque de France archives (purchasing and selling prices), and Statistical Annexes. we found that, during the period under study, the Banque de France tried repeatedly to adjust its buying price for bullion in an attempt to attract it, or instead keep it away. As shown in Fig. 5.4 in the case of gold, when a metal was plentiful, the Banque typically lowered its buying price. For instance, in 1854, then from 1858 to June 1860, the Banque took in gold below par. It would accept the currency vouchers issued by the Mint only upon payment of a discount at least proportional to the number of days required for mintage.198 But when it wished to stimulate ﬂows of gold or silver into its coffers, it raised its buying price and took in the metal at par (thus cutting on coinage expenses).199 It did this from late 1855 to late 1857, and from 1861 onwards. In practice, however, such action could not have dramatic effects on reserve accumulation. When bullion was scarce, ingot prices tended to climb above the Banque's buying price. The slight incentive provided by the Banque was too little to replenish reserves.200 At such moments, until the mid-1860s, those routine over-the-counter intakes were supplemented by positive action known as the ‘specie policy’ ( politiques d’espèces).201 Technically speaking, this practice involved buying large amounts of gold

198

The minting shops sometimes granted reductions on big contracts (see next chapter). The Banque may therefore have made some savings from being a major client of the Paris Mint. The Banque's discount was calculated from the bank rate.

199

That is, at the Mint Tariff, without discount. A note (written in the 1870s) found in the Banque's archives (Archive BdF, B101-3) states (our italics),To sum up, the orders to mint have for the past seventy years been issued sometimes at par, sometimes with discount, depending on the state of the reserves. The discount principle has never been abjured. The Banque has conditioned the principle's application upon the scarcity or abundance of specie, seeking to reconcile its own interest with that of the country.

200

As Fig. 5.4 shows, gold prices in Paris in times of gold appreciation tended to rise above the Banque's buying point, meaning that coin had no cause to ﬂow into its coffers.

201

See Ramon (1929) and Plessis (1985b).

THE RULES OF THE BIMETALLIC GAME

115

or silver directly on domestic or foreign markets in order to prop up reserves in the face of exceptional, but presumably passing, demand. The central bank swapped securities (government bonds or commercial paper) against bullion, with the latter being acquired at or above market prices. Foreign bullion markets could be preferred to domestic ones since this supposedly avoided exacerbating conditions at home (by taking metal where it was already scarce). The ingots were then quickly processed into coin,202 for the purpose of replenishing the reserves and meeting demand for redemption, until the pressure went off the money market.203 This ‘policy’ was by no means a bimetallic specialty. Rather they correspond to an early stage of monetary practice that prevailed before changes in the discount rate became the key weapon in the arsenal of European central banks. As recent research is discovering, such operations, in France as elsewhere, preceded, supplemented, or replaced adjustment of the discount rate as a tool for defending reserves. They can be regarded as a sort of temporary loan from the market to the central banks, and should work if there is no fundamental imbalance or conﬁdence problem.204 Before 1844, the Bank of England on several occasions used gold purchases to avoid having to raise its prime rate. In 1839, with its reserves plummeting, the Bank of England bought French gold through the Barings. The Barings in turn drew the equivalent in gold of two million pounds sterling (roughly equal to 50 million francs) from twelve Paris banks, which was then discounted by the Banque de France. The gold obtained was sent to England where it reportedly helped forestall a suspension of payments (Flandreau 1997b).205 Similarly, Jaime Reis (2002) demonstrates that the Bank of Portugal lived on loans granted by London institutions, including the Barings. These loans were used to roll over the gold reserves to meet statutory limits. In any case, the Banque de France was a champion user of the specie purchases. The ﬁrst French ventures into buying bullion to shore up the reserves took place well before the years of concern to us. In 1836–7 and from 1846 to 1848, the Banque acquired large quantities of silver.206 During the 1850s and 1860s, these operations were carried out on

202

The Banque de France's archives mention dealings with mint shop directors (Dierickx and Bussière) so as to hurry up production.

203

These were of course short-term expedients. As John Stuart Mill noted (from Enquête sur la Nature et les Faits Généraux, Vol. V: 591), ‘A Bank directed by capable men, will, as soon as its reserve starts to depart, ﬁnd in its knowledge of trade antecedents the means of recognizing the particular causes that have produced the efﬂux. It will know whether the specie is tending to leave in indeﬁnite quantity or in deﬁnite quantity only.’

204

See, for example, Rouland's testimony concerning the 1857 crisis (1870 Enquiry: 83):Europe had need not only of silver for India or the countries which had kept this Standard. Everyone knows that in Hamburg the most terrible crisis ended only with a loan of 10 million Marks banco dispatched by special train from Vienna. Austria, which was not required to repay its notes at a controlled price, could thus usefully employ its silver bullion. Europe also had great need of gold. The Bank of England, in order to procure it, raised its discount to ten per cent; and the Banque de France, which did not yet have the Act of 9 June 1857, was required to buy almost 500 million worth of gold, on which it paid a premium of over 4,200,000 francs.

205

Viner (1937: 273) praises the operation as having successfully prevented the suspension of specie payments.

206

Viner (1937) wrongly states that the Banque de France's purchases in both 1847 and 1848 concerned gold. The Banque's archives make it clear that, while there were some deliveries of gold, they took place in 1848 only and involved only triﬂing sums. The bulk of the transactions concerned silver. This distinction is not unimportant, as will be seen later.

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a much vaster scale, this time with gold. Ingots were massively purchased from 1855 to 1857, then from late 1860 to 1862, and ﬁnally from 1863 to 1864. From 1855 to 1857, a period which will be examined in greater detail, the Banque bought about 1.3 billion francs worth of gold for coinage purposes—a number which must be set against the total French coin output of the 1850s which was about 3.5 billion. Certain authors, such as Plessis or Cottrell, have more or less explicitly argued that the specie purchases were aided and abetted by the workings of the double standard. The notion here is probably that, since the normal operation of bimetallism implied a tendency for at least one metal to ‘depreciate’, there was always one cheap source of bullion for the central bank to buy. This brings us back to the by-now familiar notion that bimetallism offered additional leeway to monetary authorities: in this particular case, ‘specie policy’ would have been an alternative to raising the discount rate. Since the turn of the century, the anti-usury laws had forbidden interest rates higher than 6 per cent. In 1857, this limit was abolished and the Banque's General Council was authorized to charge higher rates ‘if circumstances so warranted’. This was not to say that toying with interest rates had become easier. The government was generally in favour of lowering rates since rises were seen to depress the price of bonds. The public also dreaded the sharp hikes which made mortgages dearer. This leitmotif was to become the battle-cry of the Péreire brothers in their campaign against the Banque de France's monopoly. Emile Péreire castigated the ‘terrible power’ to raise the discount rate, which he branded as the source of ‘fearsome disorders’.207 For this reason, the Banque de France, until the mid-1860s and the defeat of the Pereire brothers, did everything it could to leave interest rates alone, even when the reserves were threatened—whence the importance of the gold purchases. The question therefore is twofold: can such purchases work and is bimetallism more likely to make them successful? To provide the answers, we shall take two examples. One is traditionally regarded as a success (the purchases in 1847), the other as a failure (the purchases of 1855–7). In December 1847, with reserves dwindling as a result of the crop crisis, which made it necessary to import wheat, the General Council approved several appropriations for buying bullion.208 The operations were arranged through the Hottinguer bank which signed contracts with the Barings. The Barings reached agreement with City ﬁnanciers to collect silver (in exchange for 5 per cent French government bonds) on the London market. The Bank of England, which occasionally dealt in silver, was approached. When it found out that the Banque de France needed the money, it proposed a small reduction in its sales price and opened a 30 million-franc credit line. The Banque de France had 20 days’ grace to try to acquire silver more cheaply (thanks to expected

207

Plessis (1985b: 205). It is not our purpose to recount the history of these debates, which has been written elsewhere.

208

This interpretation of the source of the drain is due to Ramon (1929) who follows contemporary opinions.

THE RULES OF THE BIMETALLIC GAME

117

shipments from Mexico).209 The total purchase amounted to 25 million francs. In the end, the Bank of England sold the bond package to the Imperial Bank of Russia in exchange for gold. After a tense spell, the reserves pulled back up, and the convertibility of notes was temporarily preserved. On these grounds, the episode was portrayed as a success.210 If we are to understand the rationale for these operations, it is important to remember their context. Until the late 1840s, the gold–silver commercial ratio remained higher than 15.58 and the Banque de France did most of its paying in écus. The Bank of England, on the contrary, paid in gold. Bimetallic arbitrages should, of course, have spread the troubles from one market to the other. But the relatively high shipping costs of the time made them imperfect substitutes. The consequence was that the reserves of each bank remained fairly impervious, at least over the short term, to a drain on the metal not, or little, used for payment on its own market. Each establishment was therefore agreeable to coming to the other's aid and ﬁnding it the metal it needed. Cooperating in this way did not harm domestic conditions, while it warded off the threat of a bank run or suspension of payments abroad (Flandreau 1997b). Better still, beneﬁcial domestic spillovers could be expected from an easing of the foreign situation. Providing the operations remained limited in scope, with the rate of purchases small compared with the size of the market, the metal needed could be ‘scraped together’ without creating a major disturbance.211 Lastly, it should be pointed out that the Bank of England then held a large stock of silver, inherited from the demonetizing of that metal, lying idle. It

209

Here is the Banque de France's ofﬁcial view of events as revealed in a note found in its archives (Banque de France Archives, sub-folder Opérations avec Banques Etrangères, December 1846):On 26 December 1846, the General Council of the Banque de France voted in favour of increasing the reserves by buying silver, and approved for this purpose an appropriation of 20 million, which at the following sitting on 7 January was brought up to 30 million. Mr Hottinguer, member of the Regency Council, departed for London and took out a loan of 20 million in the name of the Banque de France with the House of Baring Brothers against the deposit of French 5 per cent Rentes at par. The loan carried 5 per cent interest and various commissions amounting to ¾ per cent. Messrs Baring Brothers, although nominally alone as lenders in the transaction, had to join with other English providers of capital to perform all or part of the operation. When the Governors of the Bank of England learned that the silver required was for the Banque de France, they were very gracious towards Mr Hottinguer and hastened to reduce the price of [silver] ingots and coin, which for long had been set by them at 60½, to 60⅜ and granted a stay of 20 days during which the Banque de France could see whether the arrival of specie from Mexico might enable it to buy at a price lower than that of the Bank of England. During this stay, the Banque de France had the option of taking only half of the loan if it so wished. Despite these favours, the loan amounted to 25 million. It was repaid by the sale of the said Rentes, offered to England as cover, to the Imperial Bank of Russia.The Bank of England had £1,500,000 worth of silver, not all usable as legal tender, in reserve at the time. See Ashburton (1847) and Horace Say (1847).

210

Such was the ofﬁcial version of the Banque (see previous note). It later confessed that the gold purchases of 1855–7 had failed to achieve their purpose. The Banque's attitude is surprising, seeing that in 1848 its purchases of silver did not enable it to escape the suspension of payments (see below).

211

This answers an old question, raised by Viner (1937: 273 et seq. ), who remarked, ‘It would be interesting to know whether the Banque de France consulted the Bank of England before engaging in this transaction, as it came at a most embarrassing time for the latter.’

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was pure liquidity, usable at any moment for injection into the system and smoothing its running. Again in 1855, the Banque de France's reserves once began to sink dangerously (Fig. 5.5). The amount of gold in the Paris reserves fell from 200 million at the end of 1854 to 37 million at mid-July 1855. What was at fault, according to Ramon, was an internal imbalance due to the transfer of specie from the capital to the rural areas (the South-East particularly) designed to pay for the silk cocoon harvest.212 The context in this case was an improvement in the terms of exchange towards the countryside, the consequence of which was a net absorption of specie there as farm incomes rose. This version is conﬁrmed by examination of the exchange rate on London; it kept steady at about the gold entry point (until August it did not exceed 25.175), so that there was no proﬁt to be made from sending gold abroad (Fig. 5.5). The drain on the reserves must have been an internal one, and the gold could be expected to reappear. The Banque therefore decided to resort to buying gold (the less expensive of the two metals and the one it used mostly for payments) on the London market. Apparently, the procedure was the same as the one followed in the previous occasion. This time, however, the demand concerned the London market's currency metal. Any hope of acquiring it from the Bank of England was dashed when an informal request by the Banque de France was declined, ofﬁcially on account of the Bank of England's own dismal situation.213 The Bank of France nonetheless decided to proceed with the help of private banks. The operation was prepared in secret. On 2 August 1855, the Governor told the General Council that, in order to head off a slump in the reserves, he had approached a ‘large Paris enterprise’ to obtain 31 million in gold forthwith. The large enterprise was of course Rothschild Frères, the Paris branch of the House of Rothschild. The Rothschilds, thanks to their network of correspondents, had secured a portfolio of sterling bills which

212

See Ramon (1929: 260).

213

Plessis (1985b) mentions a business trip made by Charles Rothschild to the Bank of England after the start of the gold purchase and follows press articles (Indépendance Belge, 21 October 1855) to argue that it was unsuccessful. In Flandreau (1997b), we rely on the archives of the Bank of England to recount the mission and its outcome. In the following years, the Bank of England would systematically refuse to cooperate with the Banque de France's purchases, sometimes attempting to hinder them by raising its discount rate. This conﬂict was known in the early 1860s, as the ‘War of the Banks’. The British press seems at ﬁrst to have regretted this antagonism. The November 1855 issue of the Bankers’ Magazine (p. 684) quotes an anonymous author as writing,It is clear that such mysterious proceedings may prove extremely detrimental to both countries. In the present cordial good understanding between France and England, it becomes the duty of both to unite their strength in every way not to divide it. I have often thought that an intimate correspondence upon emergencies between the two Banks of France and England might be beneﬁcial to both; and if the existing charters of either do not now admit it, an alteration or power to accomplish that object might be given for their mutual advantage.The anonymous author's initials were W.B.: possibly Walter Bagehot (Flandreau 1997b). Later, the gold purchases set off ﬁerce reactions in the English papers. The Banque de France was blamed for upsetting the London market and refusing to tinker with the discount rate, which was perceived in London as the only legitimate line of defence. While this instrument had ﬁnally been accepted in England—after much controversy—it was far from meeting with universal approval in France.

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119

Fig. 5.5.Banque de France reserves, gold purchases, and monetary policy (franc millions (reserves: left axis) and % (interest rate: right axis))

Source: Statistical Annexes. they had gathered in various ﬁnancial centres. The portfolio could readily be cashed and the proceeds used to buy gold mined in California and Australia upon arrival. The operation was the beginning of a 3-year-long series of continuous purchases of gold. From that date until January 1858, the Banque's balance sheets published in the Moniteur (the French ofﬁcial gazette) regularly reported premiums paid to acquire the gold.214 The bullion purchase contracts quickly became a subject for debate within the General Council. The arguments turned on the most suitable methods for acquiring the bullion and the overall efﬁcacy of the measures taken. At the beginning, the Governor's opinion prevailed. He preferred to deal with a select supplier, who received a general brieﬁng on what had to be done, and fat fees. It was a method that, as the Governor put it, ‘took the market by surprise’ and allegedly enabled the gold to be spirited out without making waves. Several inﬂuential Regents at ﬁrst supported this solution. Among them was Durand who said that ‘the main beneﬁt of ﬁxing a large sum in advance is that M. de Rothschild needs to be ready to buy immediately gold arriving unexpectedly from either America or Australia.’215 Having a single agent also improved

214

The Banque's archives, of course, contain fuller information on the subject. For the general public, however, the Moniteur 's reviews gave the clearest account of the Banque's operations.

215

Minutes of the General Council, 5 February 1856.

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the degree of supervision. It was important to be sure that the gold was not bought with silver for, in that case, the debit would be exactly offset by the credit.216 However, despite large-scale and costly purchases, the reserves stayed ﬂat. On 13 December 1855, the gold reserves in Paris amounted to 46 million, compared to 37 million at mid-July before the buying began. Some General Council members began so far as to questioning the usefulness of the gold purchases. It was blindingly clear that much of the 271 million bought since the summer had evaporated into thin air. This was still not enough to shake the sturdy optimism of Regent Vernes. Reporting on the operations that had to date cost 4.16 million francs in premiums, he declared,217 These deliveries of gold have been done most expeditiously, thanks to the work of the honourable House of Rothschild Frères which managed the purchases. The operations depended for their success on numerous ﬁnancial combinations. If the Banque had entrusted the task to less solid houses, they would have been obliged either to take out paper suddenly on London or to draw drafts there. This would have pushed the exchange rate up, perhaps to the point of forcing us to re-export gold. The House in question, however, had prepared a substantial reserve of paper on London, whether in Paris or on the various markets of Europe, beforehand, and was so able to pay for the large purchase in question without affecting the exchange rate on London. It did not have even to resort to the Bank of England's discounts, which that Bank would perhaps have been reluctant to grant on seeing that the purpose was to export gold. These details explain the high price of the purchases. The ﬁgures tell a quite different story (Fig. 5.6). The very ﬁrst round of claims bought on London did not affect the exchange rate, but the following contracts struck a market that was running dry. They sparked an immediate ﬂare-up in the prices of bills on London. In September, exchanges on Paris depreciated sharply. After a short period of incomprehension (suggesting that the market might have been, for a while, ‘surprised’), the British bankers spotted the cause of the drain that was taking place in London.218 The exchange rate for the pound shot up from 25.075 to 25.3 francs, a rise of about

216

As Ramon (1929) explains, the Governor seems to have thought that the Rothschilds had given an undertaking to buy the gold with bills on London. But, as will be seen later (Chapter 6), the bills on London had been acquired by selling silver on the English market!

217

Minutes of the General Council, 13 December 1855. See also the Banque de France's archives, note entitled ‘Achats de Lingots et de Métaux Précieux’, in folder Opérations sur Lingots et Monnaies d’Or. Vernes had already entered into dealings with the Rothschilds at the time of the 1848 purchases.

218

See the article in the Bankers’ Magazine, ‘{The Gold Purchases of the Bank of France}’ (November 1855: 681):At ﬁrst, the severe drain caused by heavy remittances to Paris was attributed to other inﬂuences than those immediately connected with this movement, and Russia, as well as Austria, were alleged to be draining from us supplies of the precious metals to recruit their own exhausted resources. It is now, however, clearly ascertained that the great bulk, if not the whole, of the bullion taken from the Bank of England and the public market is for the Bank of France, whose specie reserves have lately experienced a great and continuous declension.The ﬁnancial press of the day was very concerned to identify the Banque de France's suppliers. The Bankers’ Magazine article lists the opinions expressed in the British papers towards the end of 1855. According to The Times, the ‘ﬁrst contract’ for 40 million francs was awarded to the ﬁrm Saint Paul. (In the Banque de France archives, it is the second contract, which suggests that the ﬁrst one went unnoticed.) The Daily News claimed that this contract was obtained by the ﬁrm Raphaël, which declined another one for 75 million, feeling that it could not honour its terms. The House of Rothschild was said to have accepted the proposition when asked.

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121

Fig. 5.6.Exchange rate, gold points, silver points, and gold purchases (1 = Parity)

Source: Statistical Annexes. one per cent. In other words, the Banque's fond hope that it could dupe the market and surreptitiously lift out the millions it needed, at the cost of hefty premiums paid to a de luxe provider, was a delusion. In its persistent attempt to build up its reserves, the Banque had succeeded only in weakening the exchange rate. Scepticism as regards the specie purchases was, as a result, gathering strength. There was a growing feeling that the acquisition of gold, continued for too long and on too vast a scale, were triggering reactions that cancelled out the beneﬁts of the original inﬂows; the Banque was trying to ﬁll the ‘bucket of the Danaides’. The increased demand for bills on London had pushed up the value of the pound and, according to some Regents, was possibly prompting a reexportation of gold. On the Paris market, speculators, guessing on the Banque's purchasing plans, ran up the price of gold to the point where it left the Banque's coffers, so preventing it from restoring the reserves.219 As an internal Banque

219

There were even fears that the Banque's suppliers were obtaining their metal by melting the coins they received from the Bank itself in exchange for banknotes. According to Regent Pillet-Will, this operation involved expenses—which included the cost of remelting and assaying, and loss on the stated weight of new coins (subject to a certain ‘tolerance’, Matigny 1857)—amounting to 0.5%. This was comparable to the premium which applied during the Banque's gold purchases (i.e. until 1857), suggesting that such a practice cannot be entirely ruled out. A Banque investigation seems to have established that the coin remelting did not happen. On 11 October 1855, the Governor told the General Council that ‘the persons with whom the Banque has dealings are completely innocent of such operations. One of them, the House of Rothschild Brothers, is, by its eminent position, above all suspicion. As to the others, those on whom the suspicion falls, it has been proved that their deliveries come from America.’ More convincing on this account is the evidence, discussed in the text, that the coining undertaken during those years did not display an anomalous survival ratio.

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memo put it, Buying gold in France does harm to circulation at the time when perhaps it should be helped. Buying it in London, at an unfavourable exchange rate, makes it even worse, increases our debt towards England and induces an equivalent outﬂow. If the exchange rate is in our favour, buying gold is unnecessary, for it will enter of its own accord, and it is dangerous, since it risks reversing the exchange rate. … It is like pouring water on a sieve.220 The main problem with this reading, generally adopted by the Banque's historians (Ramon 1929; Plessis 1985b), is that it is not wholly consistent with the data. More especially, the 1,300 million bought could not have been remelted or exported in any large quantity; ﬁrst, because the period 1855–7 was marked by a net inﬂux of gold and, second, because the period does not seem to have experienced any exceptional ‘mortality’ compared to surrounding years; the survival curve for napoléons shown in Chapter 4 does not reveal any anomalous losses during those years. This rules out the eventuality of extensive remelting of the newly minted metal. Besides, the exchange rate, except in September 1855, remained fairly well removed from the gold export point, and in any case never bit into it (Fig. 5.6). But if the gold bought by the Banque was neither remelted nor re-exported, how do we explain the stagnation of its gold reserves? The answer is to be found by looking at silver. It is quite true that rising demand for London bills (extremely heavy following the ﬁrst purchases) drove up the exchange rate. But, since it was a period of substitution of gold for silver, gold was relatively more plentiful in London and silver was relatively more plentiful in Paris. Silver was thus the dominant means of payment in the Paris–London direction. Technically, in line with the analysis in Chapter 3, the silver export point lay below the gold export point. Were the franc to depreciate, silver would be exported. Consequently, as Fig. 5.6 suggests, the sudden surge in the exchange rate in September 1855 was offset not by an outﬂow of gold but by an outﬂow of silver.221 As was seen earlier, the écus in circulation were, after 1854, to be found less in the towns than in the countryside, where notes were little used. The outgoing silver had to be replaced by gold which was in turn sucked away from the reserves of the Banque. What existed therefore were two opposite ﬂows: a ﬂow of silver leaving France, and a ﬂow of gold into the heart of the country. The Banque's reserves, caught between these two movements, were prevented from growing. A natural question is whether the Banque de France, by persisting in its purchases of gold from 1855 to 1857, was responsible for accelerating the substitution of gold for silver. This is the argument upheld by Plessis.222 It needs to be said, however, that the gradual replacement of silver by gold had started well before summer 1855 and

220

Probably after 1865, that is, after the suspension of specie purchases. (Banque de France archives, note by Burdeau, 7th F80.)

221

Some Regents, such as Schneider, de Waru, or Durand, seem to have noticed this fact. According to Durand, ‘the stability of the exchange rate on London proves that the gold entering France was paid for with the silver leaving it.’ (Quoted by Plessis 1985b: 168). The next chapter will again feature the Rothschilds, but in the role this time of zealous silver exporters.

222

See Plessis (1985b: 167) who writes, ‘The Banque strongly contributed to a swifter accomplishment of the metallic revolution.’

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continued long after 1857. In deciding whether the Banque played a real part in ‘the metallic revolution’, we must determine whether its actions generated more substitution than the ‘natural’ replacement that would have resulted from private dealings. Let us assume that the Banque induced a bigger absorption of gold and expulsion of silver than the market would have been inclined to do. The Banque, by imposing an excess inﬂux of gold and departure of silver, would inevitably have ended up reversing the relative scarcities of the two metals on the London and Paris markets. Gold would have become relatively more expensive in London and silver more expensive in Paris. It would then have become more proﬁtable in France to use gold to pay Great Britain; technically, the gold export point would have dipped below the silver export point. That during the whole period of specie buying silver was the preferred metal for export while the silver export point stayed constantly below the gold export point (as is visible in Fig. 5.6) proves that the Banque's action had only a negligible effect on the underlying substitution process. In fact, if the Bank was able to purchase such massive amounts of gold without causing gold to be re-exported, it was because the gold boom in California and Australia precisely required a massive substitution. The Bank was surﬁng on a market wave. This interpretation is all the more plausible in that, from 1856 on, doubts as to the wisdom of relying exclusively on the House of Rothschild led the Banque to trim the average of its premiums and broaden the circle of its intermediaries.223 The Banque, instead of demanding that its suppliers procure the gold ‘at all costs’, offered to buy up, for a milder commission, the claims on London that arrived in their portfolios. It was a method that ran less risk of upsetting the exchange rate but did nothing to swell the reserves. At best, the Banque could obtain the amount of bills on London that matched the specie balance with England (net of the outﬂows of silver needed to adjust the commercial ratio on the two markets). Which is to say that the Bank of France was purchasing the amount of gold that would have come in, in any case. 1855 1856 1857

Specie purchases 271 498 565

Net gold imports 218 375 446

Minting 447 508 572

In this situation of equilibrium, the Banque could not hold more than what dealers were prepared to give it. This can be illustrated by cross-checking the Banque's gold purchases, the net inﬂows of gold, and the minting of napoléons during the 3 years of gold buying. The three series tally.224 Since people, given the prevailing monetary conditions had refused to surrender their stock to the Banque, the Banque had to give up the idea of holding the coin merely to let it pass through its cash desks. The net ﬂow depended on the economy's demand for money. Without an alteration of the domestic

223

See Minutes of the General Council. The ﬁgures show that the average amount of premiums paid out by the Banque fell from 1.47% in 1855 to 1.2% in 1856, and 0.6% in 1857.

224

The following are the relations among net entries of gold, its minting and purchases of specie. (In 1855, specie purchases occurred during the second half of the year.)

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monetary conditions (and in particular of the interest rate) the gold would end up, not in the reserves, but in the hands of the public. The Banque's policy was thus merely a veil covering a process that would have occurred without it; it had no palpable inﬂuence on the metallic revolution and was powerless as a substitute for discount rate increases (Fig. 5.5). In 1857, given the futility of purchasing gold to shore up the reserves, the Banque, which had come within a hairsbreadth of having to suspend its payments in coin, was ﬁnally authorized to raise its discount rate in order to defend its reserve position. The Banque, by making credit dearer, reduced the French economy's demand for money and at last succeeded in attracting gold into its vaults. Bimetallism had proved to be just as hostile an environment for the ‘specie policy’ as a monometallic standard would have been. And this is because such tactics remained a crude and insufﬁcient weapon for the conduct of monetary policy. The true weapon, whatever the underlying regime, was the discount rate, as Fig. 5.5 shows.

4. CONCLUSION: THE BANQUE, THE BANKERS, AND THE DOUBLE STANDARD The Banque de France, it now appears, does not seem to have beneﬁted from the bimetallic system, contrary to its ofﬁcial line in the late 1860s. Nor had it ‘suffered’. As time passed, the Bank learnt to manage its reserves, with the aid of the Paris bankers or that of foreign banks of issue. Similarly, the failure of specie purchases in the 1850s merely proved the limits of any attempt to defend the reserves by borrowing bullion on the market. If France had been on the Gold Standard, buying gold would not have succeeded any better; it would have been gold that ﬂed. Yet if bimetallism neither clearly beneﬁted nor harmed the Banque, what reasons lay behind its support of the system in the polemics of the late 1860s? How can it be explained that the Banque, despite being convinced from 1857 of the inanity of specie purchases (Ramon 1929; Plessis 1985b), pursued them—admittedly on a reduced scale—until 1864, and lent its support to bimetallism afterwards? A partial explanation for the Banque's loyalty to the double standard in the late 1860s may be obtained by looking at the trends then at work on bullion markets. Beginning in about 1865, growing silver production was pushing the commercial ratio above 15.5. Both gold and silver ﬂowed into France and piled up in the Banque's reserves. This allowed the Banque to set an especially low interest rate. Even though the relative depreciation of silver persisted, a trend reversal was in the ofﬁng, owing to expectations of an increasing silver production. If the expectations were conﬁrmed, arbitrages would this time stimulate exports of gold and imports of silver, bringing back memories of the position before 1848. Silver would then predominate again in Paris, possibly lessening the French market's sensitivity to disturbances in London. This was the opinion of Governor Rouland, who declared in 1870 that specie purchases had failed from 1855 to 1857 because the appreciation of silver had obliged the Banque de France to procure the English market's standard metal. He nonetheless claimed that bimetallism offered

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125

other conﬁgurations (gold alone in strong demand, or both metals tending to depreciate simultaneously) from which the Banque stood to gain.225 The argument was somewhat strained and told only part of the story. The plunge in shipping costs between 1850 and 1870 (they were divided by three) meant that arbitrages would henceforth be less expensive. This would create greater inter-dependence or ‘solidarity’ among the different ﬁnancial markets, so that ‘home-made’ solutions would become more difﬁcult. Already in 1848, suspension of payments had been delayed only through buying up silver, good proof that dissimilarity in the means of payment in the two capitals offered only thin protection. Mexican piastres acquired through the agency of French banks in the spring had not staved off the currency crisis.226 A careful look at the sources conﬁrms this view. Much as the gold purchases of the 1850s had ﬁnished by sending up exchange rates on London and neutralizing the specie purchases, so the repeated purchases of silver in London in 1848 had ﬁnished by depressing the exchange rate on Paris and threatening the re-departure of the metal just bought. On a letter to the Rothschilds from the Governor of the Banque de France, Vernes added the note, ‘Your House began by operating very well and issuing some drafts at a good price, which it has been unable to sustain.’227 The experience of the 1850s was in a sense just a larger-scale replay of that of the 1840s. In fact, the Banque de France's support for the double standard probably had deeper explanations. We argue that they are related to the broader debate on the monetary question. The Banque, under pressure from the Péreire brothers who had a certain entrée with Napoleon III, had tried to avoid tampering with interest rates. Meanwhile, specie purchases could not be effective unless the metal ﬂowing out was continually replaced by new acquisitions, a sure recipe for ruin. As one of The Economist's correspondents rightly pointed out, ‘As long as the Bank of France can purchase gold at 6 per mille premium more rapidly then she is called upon to discharge those notes and other obligations with coin, she may keep up her metallic reserve; but in doing this, the Bank is playing a losing and dangerous game.’228 If the Banque de France was the loser, the supplying bankers were not (Table 5.2). All of them, from the Rothschilds and the Regents (who, like Durand, had criticized specie purchases while continuing to supply the Banque with specie) to the smallest cambists, had gained from the Banque's premium-loaded purchases of ingots. But, in return for this largesse, the Banque demanded the bankers’ loyalty. It knew how much they had deposited and took care that they did not withdraw those sums, at least not completely; otherwise, it would stop dealing with them. This system, which amounted to de facto reserve requirements, had the incidental effect of contracting credit just as the taboo raising of the interest rate would have done. It was an indirect way of enrolling

225

See, for example, Rouland's testimony at the 1870 Monetary Enquiry.

226

The Rothschilds provided 22.9 million (Banque de France archives, Métaux Précieux, Achats de Matières d’Or et d’Argent, 1848 ). See also Archives Rothschild 132 AQ 122. Other ﬁrms (Lyon-Allemand, Monteaux & Fils, and Emerique) also supplied silver, in lesser quantities.

227

Archives Rothschild 132 AQ 122, letter of 15 April 1848.

228

The Economist, 16 May 1857.

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Table 5.2. Bank of France Gold Purchases 1855–1864. Premiums or discounts (compared to Parity) on the Bank account, franc thousands Year 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864

Discount 0 0 0 328 440 147 0 0 0 0

Premium 4,160 6,010 3,855 0 0 283 880 0 223 719

Source: Bankers' Magazine, Banque de France archives.

the bankers in monetary policy adjustments.229 Being a form of indirect control of the money supply, these policies made it possible to gain time. The Rothschilds, in exchange for comfortable premiums to the tune of 8.5 million francs (see Appendix F), were thus able to help in maintaining the Banque's reserves, keeping them high enough to reassure the public and preventing the difﬁculties from degenerating into panic. The Banque, at the cost of a few millions lavished on a ‘club’ of hand-picked bankers, managed, if not to replenish its reserves, at least to avoid their utter collapse. In the ﬁnal analysis, the Banque's support for the double standard appears to have had little to do with the supposed monetary policy instruments with which the system allegedly provided it. In particular, the ability to pay in the cheapest metal in a system where the exchange rate between gold and silver was pegged through arbitrage bore no resemblance to the technique which the Bank of France would reﬁne after 1880 under the Gold Standard to avoid paying with its gold reserves by using heavily depreciated silver coins instead. Under the bimetallic system there were many fewer ‘devices’ than would exist under France's later version of the Gold Standard. The alternation of gold and silver payments, the reserve swaps, or the specie purchases were of limited effect if any; they were at the very best simple tools for taking advantage of bullion market tensions rather than genuinely structural weapons.

229

In return, it was not unknown for certain bankers to solicit favours when the currency situation was more tranquil, calling to mind that they had come to the Banque's aid in times of crisis. We have the example of the Comptoir d’Escompte (Minutes of the General Council, 2 January 1862) which, pointing out that it had not withdrawn gold from the Banque when it was in difﬁculty, suggested that it might be offered certain advantages now that conditions were easier. Similarly, the Banque's archives mention that the Rothschild Bank helped to replenish the Banque de France's reserves in the early 1870s, following the period of inconvertibility. It may also be remembered that, since the top Paris bankers were also Banque Regents and shareholders, they had a personal stake in proﬁtability.

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127

In considering the Banque's partiality towards bimetallism, we should remember that for it the Second Empire years were a time of learning. It had received the monopoly of issue in 1848 and this monopoly was still disputed. It had gradually found how to adjust its payments to the commercial ratio. It had discovered that foreign metal purchases, previously thought to buttress the reserves, were no longer of use, owing to the growing integration of the ﬁnancial markets and transport arbitrage. It had won, by stages, the legal then the political right to adjust the discount rate. It ﬁnally mastered the rules of the bimetallic game. On the other hand, the Gold Standard was a leap into the unknown, and monopolies have a holy terror of change. As Governor Rouland put it in concluding his testimony at the 1870 Enquiry:230 I endeavour to sum up the whole of my declaration by saying … that the abolition of silver as a Standard … is a rash step, based solely on dubious assumptions or frail assertions. On the contrary, the existence of the two Standards rests on a usefulness conﬁrmed by experience. … Let us not therefore change our monetary system merely to satisfy a theory. … Let us keep what God and experience have consecrated. It is the surer and wiser course. The speed with which the Banque de France, faced with the malfunctioning of the double standard, completely changed horses in the 1870s and threw its support behind a radical amendment of the Act of Germinal proves, as will be seen, that its support for bimetallism was purely a matter of circumstance.231

230

Enquête sur la Question Monétaire (1872, Vol. I: 64–99).

231

This about-face astonished certain attentive authors, such as Willis (1901), although they are at a loss to explain the reason for the reversal. For a viewpoint which lays emphasis on the British side of the affair, different from the one put forward in this chapter, see Cottrell (1992). Cottrell, who draws largely on the British press's vituperation against the Banque de France, holds that the replacement of silver by gold was a rough and disjointed process. The proof of the tension between the two Banks lies, in his view, in the high nominal interest rates over the period 1852–67 (Cottrell 1982: 143). ‘One effect of this struggle, this friction in the mechanism of the parachute, was to push up interest rates which in England between 1852 and 1867 were at their highest nominal levels for the longest period of time for the whole of the nineteenth century.’ This thesis is far from crystal-clear. For one thing, the Banque de France halted its premiumed purchases of gold in 1864, not 1867. The problems of the high London rates in 1866 thus had nothing to do with French specie purchases, nor even with the replacement of silver by gold which, as we have seen, had stopped. For another, the high level of nominal interest rates in the 1850s and 1860s should be seen for what it was, these being years of inﬂation. The slightly lower nominal interest rates of the 1870s, when prices were falling, were higher in real terms.

6 Scale and Scope: Coinage, Arbitrage, and Bimetallism We must not forget the essential role played by the House of Rothschild in connecting the French and British money markets … The House of Rothschild intermediated between the Gold and Silver sides of the international monetary system. They were the super arbitrageurs who had the huge reserves and prestige necessary to play successfully a role which remains to be described in full details, but whose importance it is possible to detect, even in the present state of research. Marcello de Cecco, ‘Gold Standard’, 1987 Until now, our methodology for studying the operation of bimetallism as a global regime has relied on the identiﬁcation of a number of markets (bullion markets, foreign exchange markets, etc.), which we assumed to be connected by the mechanics of national and international arbitrage. For this purpose, we assumed the existence of ‘shocks’, seen as imbalances between supply and demand, occurring on speciﬁc markets, so as to construct a geography of bullion ﬂows. While analytically useful, this account should not be read too literally. It would be wrong, for instance, to think of particular supplies and particular demands as being ‘owned’ by individual markets. There were indeed places where deals in gold and silver were made, but supply and demand—as aggregates of individual resources and needs—transcended frontiers. We argued that when silver was cheaper in Paris that was where it was obtained, thanks to the action of arbitragers who could proﬁtably step in to ship the ingots once the difference between quotations on two distant markets exceeded the cost of transporting them. Yet at least as important was the action of buyers and sellers who responded to price imbalances by redirecting demand and supply. The image of the arbitrager as the invisible hand purging the market of inefﬁcient situations, in other words, does not tell us much about the way international monetary equilibrium was reached. The idea of a multitude of markets as so many ‘islands’, each having its own supply, demand, and information, is exact only if trading (local buying and selling of bullion) and arbitrage (shipping of bullion from one ‘island’ to another) are distinctly specialized activities. In practice, the two activities were closely intertwined in the world of international ﬁnance—then known as the ‘Haute banque’.

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Historically, the Haute banque grew to the status of a global ruling ﬁnancial power in the mid-nineteenth century from the fertile soil of merchant banking, that is, the funding of long-distance trade.232 In the beginning, some entrepreneurs with an experience in shipping and trading began using their capital and networks of partners (‘ correspondents’) to make payments on behalf of other merchants, thus providing funding to the international trading system. These ‘bankers’ advanced the money needed until the goods were cashed and money rolled in. Merchant bankers thus found themselves at the intersection between ﬂows of money, ﬂows of capital, and ﬂows of goods. Initially, these dealings were conducted largely within single networks, with the web of correspondents acting as a kind of multinational enterprise. Increasingly, the development of ﬁnancial centres enhanced the efﬁciency of the general system by providing occasions for mutually favourable exchange between alternative networks.233 The creditor balances that a Venetian banker held on some Levantine merchant could be cleared against the debtor position of some other ﬁnancier in Venice. This system, whereby overdrafts were transformed into securities (bills), generated considerable savings on the shipping of coins and dramatically improved ﬁnancial integration. The books of merchant bankers thus served to clear global trade, global ﬁnance, and global ﬂows of money.234 At the time when this story begins (circa 1830), leading ﬁnancial markets were the physical places where global clearing occured. As a matter of fact, trade in bullion, trade in ﬁnancial instruments, and trade in foreign staple goods were often organized under a common roof, or at the very least were located close together. When a compensating deal could not be made (as in the case of an imbalance in the cross-ﬂow of goods without a counterbalancing ﬂow of capital), it became necessary to organize some form of settlement, which typically took the form of a transfer specie. In this way, bullion trading, bullion transport, lending, and commodity dealing dovetailed together as the different facets of the banking profession. This explains the fairly low degree of specialization between trade and ﬁnance, conﬁrmed by foreign exchange manuals published in the eighteenth and nineteenth centuries.235 A commonplace of all these handbooks was their emphasis on the ‘chain rule’ (then known in French as the règle conjointe), which was the essence of global arbitrage: it

232

It is not our intention to retell this history, except for a brief mention of the aspects relevant to our subject. A classic reference is Chapman (1984). The book by Ferguson on the Rothschilds (Ferguson 1998) adds to other scholarly contributions on the matter (especially Gille 1965 and 1967). As regards the development of the exchange markets and the bankers’ role in their operation during the eighteenth and nineteenth centuries, see, for example, Cole (1929b) and Einzig (1962).

233

These different exchanges, once properly organized, issued regular quotations and published information on prices. For the early modern period, see Michel Morineau (1985). Larry Neal's book (Neal 1990) contains an excellent introduction to the mechanics of international exchange in the seventeenth and eighteenth centuries.

234

As Claude Fohlen put it (Fohlen 1956: 111): ‘The separation between bankers and merchants is hard to establish owing to the inter-penetration of the two professions. The bankers were often merchants who had extended their activity to the ﬁeld of credit.’

235

E.g. Kelly (1835), Vibert (1844), Tate (1852, 1856), Le Touzé (1868), Clare (1893), etc.

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made it possible to translate gold into grain, grain into credit, and credit into silver.236 And the examples given to the would-be bankers were signiﬁcantly not limited to ﬁnancial operations stricto sensu. Tate's book, a classic in its kind, emphasized that commodity arbitrage calculations are usually done to determine the arbitrated price (and thereby the market where the commodity will sell best), but also sometimes to ﬁnd the arbitrated exchange rate, which is produced by a commodity bought in one country and sold in another.237. Even closer to our point, we ﬁnd, leaﬁng through Bertrand Gille's masterly study of Rothschild Frères, the bankers buying in New Orléans plantation cotton, which is ‘expensive’ in Europe against drafts on London which are ‘rare’ in Louisiana. We ﬁnd them bartering gold in San Francisco against ‘rich dark’ French cognac, much in demand in California.238 There is no end to such examples, and Niall Ferguson's book on the House of Rothschild (Ferguson 1998) provides ample evidence of the diversity of activities of international ﬁnance houses. The point we make here is that the Haute banque worked a global market, not only horizontally by connecting various parts of the world together, but vertically, by integrating together the main components of a global capitalist economy: to repeat one last time: trade, money, and ﬁnance. Managing the global market, which rested on neighbouring but dissimilar monetary areas, in the absence of cover instruments, certainly required a high degree of exchange stability among the different zones. Once this condition was met, High Finance could go about its business of free-wheeling intermediation without risk. This makes it easier to understand the contention of many authors that the ﬁnanciers (and in particular, the House of Rothschild) had a vested interest in the double standard.239 It allowed them to

236

Lafﬁtte, the prototypical nineteenth-century merchant banker, revealingly (if with some self-complacency) traces his ﬁrst stroke of ﬁnancial genius to his discovery of the ‘chain rule’ when he was still a simple apprentice. (See Lafﬁtte 1932.)

237

And hence whether there is proﬁt to be made from sending a good from one market to another. Tate's Arbitrations on Merchandise, Appendix to the 1829 and 1834 editions, p. 220 et seq. This book, ﬁrst published in 1829, quickly became a classic, under the name Tate's Cambist

238

Bertrand Gille (1967: 539–64).

239

See Parieu (1872), who lambasted the ‘hesitations of our ﬁnanciers’ to abandon bimetallism; or Magliani (1874: 202) commenting on the suspension of the freedom to mint silver in Italy: ‘There is only one branch of trade for which the suspension of the double standard would be harmful … the trade in precious metals.’ See also Willis (1901) who notes, ‘The Haute Finance consistently and strongly supported the bimetallic policy. … Bimetallism afforded the best opportunity for proﬁtable arbitrage operations.’ More recently, Mertens (1944), Gille (1965, 1967), Thuillier (1983), and de Cecco (1989) make the same observation. Such assertions have always remained fairly vague, largely because the secrecy surrounding the activities of the Haute banque make it difﬁcult to investigate its role. The opacity is not hard to explain. As argued in Chapters 4 and 5, the 1857 Currency Commission raised the possibility (without much conviction, certainly) of imposing controls on specie movements. Its report is amusingly equivocal as regards the ‘natural’ or ‘baneful’ inﬂuence of cambists (bankers, bullion traders, etc.):They have an interest in gathering and exporting money only because the needs of the trade demand it. They do not create the movement, but they foster and precipitate it. In some respects, which the Commission does not deny, their action can have positive effects. But from the point of view of our circulation which this movement tends to impoverish, harm exists. While they are not properly speaking the cause of the harm, they are at least the instrument without which the harm could not be done. (Documents Relatifs à la Question Monétaire (1858): 21.) It was prudent to lie low.

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operate in a stable environment, devoid of exchange turmoil between the gold zone and the silver zone. But probably more important, the double standard further reaped them the arbitrage proﬁts engendered by the stabilization process itself. International bankers, with their networks of correspondents and expertise in arbitrage, became the chief operators of bimetallism as an international regime. Studying global arbitrage, and looking at it as an activity that involves service components (shipping, handling), as well as industrial ones (melting, coining), will enable us to penetrate the logic of a business that economists often take for granted. As a result, this chapter should be read as an essay in industrial economics, an attempt to lay bare the forces and constraints of commodity monies: for these shaped the international monetary system of the time by determining its structure and organization. One last word before we proceed. This chapter will take the House of Rothschild and especially Rothschild Frères as a guiding thread in our investigation. The Rothschilds, of course, were not the only bank to engage in bimetallic arbitraging.240 They did not hold a monopoly in that business, and if in some cases they came close to occupying a leading position, the ‘monopoly’, as this chapter will make clear, remained what is known as a ‘contestable monopoly’, that is, a situation in which the monopolist is obliged to trim his margins to keep competitors at bay, as though he were not a monopolist.241 The point here is that the Rothschild's experience is archetypal, providing a key to the inner workings of the monetary system which is our subject. The House of Rothschild is thus to a large extent the ‘representative agent’ with which the previous chapters have dealt anonymously. It is in this sense, and in this sense only, that bimetallism was ‘a Rothschild business’.

1. SCALE, SCOPE, AND ARBITRAGE Because bullion was the closest competitor to international exchange—as Chapter 3 amply demonstrated—control over bullion shipping played a key role in obtaining control over the international monetary system.242 The bank which had the most effective system for collecting and delivering bullion had a decisive edge over its competitors. It could arbitrage with smaller proﬁt margins and so corner a larger part of the exchange market; it could buy and sell bills at rates which its rivals could not match, and so attract a bigger share of international clearing operations. By doing so,

240

The whole of the Haute banque was in the act. It would be interesting to study the archives of other banking establishments and ﬁnd out more precisely what, in the practice of the Rothschilds (examined below), was peculiar to them and what was more general. A case in point is the Franco-British House of Raphaël, Berend & Co., a competitor and partner of the Rothschilds (see later), which played an important part in the trading of bullion. Its archives exist and may be consulted in the Archives Nationales. Their study would almost certainly enrich the conclusions of this chapter.

241

The stability of exchange rates and the gold–silver ratio within the bullion points is a clear indication, as has already been remarked, of the efﬁciency of this sector. It is an indirect indication of the degree of competitive pressure that must have existed in the area.

242

Cole (1929b: 420) explains that since bills of ‘exchange [were] in some measure a direct substitute for specie and commodity shipments, [they] had to compete with [them].’

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it could increase its market share in the global credit system and improve its position in international trade. International bankers had therefore to have at their disposal a completely reliable, fast-acting, and adaptable network for bullion remittances.243 Their aim was to achieve maximum efﬁciency in the management of international transactions. This business required assembling together a long string of actions. Alongside the more obvious activity relating to shipping itself, there was a processing industry equally vital to the arbitrage system. Ingots had to be turned into coins, and coins into bars. The bars had sometimes to be reﬁned, or remelted, their ﬁneness checked, and their weight ascertained before they could be reshipped and resold. Along the road, chemists, engineers, factory-hands had to be put to work, and their contribution was all the more important in that progress in communication was tending to standardize transportation costs and reduce the competitive advantages stemming from good information and geographical reach.244 In this context, the way to go was to work back up the chain and gain control over reﬁning and minting, the two key stages in bullion processing.245

Rening Reﬁning was a branch of applied chemistry which ﬂourished remarkably in the course of the nineteenth century. In 1820, if we are to believe a contemporary report by an expert named Humann, the ‘art of reﬁning’ was in a ‘state of extreme imperfection’ (see Thuillier 1983). Half a century later (in 1868), Seyd portrayed it as a genuine industrial activity that drew on the advances of science: ‘The business of Reﬁning Bullion’, he wrote, ‘where it is carried on a large scale, requires spacious and well-appointed premises. Tall chimneys must be erected, to carry off the smoke of the furnaces, and the fumes of the Acids used in the process. On the outside a Reﬁnery

243

See Cole (1929b) for the Anglo-Saxon equivalent:For along time, it seems, this branch of ﬁnance resisted encroachment of the incorporated institution; and the reasons may perhaps be found in the need for rapid, unhampered and frequent decisions in trading, in the utility of intimate personal contacts with a large body of merchants and in the necessity of reliance by the English houses upon the strict personal integrity of the American correspondents in many of these operations.

244

The famous myth that the Rothschilds’ fortune originated in their prior knowledge of Napoleon's defeat at Waterloo is a perfect illustration of this notion (on this point, see Ferguson 1998). Note that, at the beginning of the 1850s, the speed of communications between England and the Continent had greatly improved. In 1852, the laying of a cable between London and Paris ﬁnally connected the two markets.

245

The mining of the metal should perhaps be added. But, as B. Gille notes (1965: 414), the sources were very scattered and their distance made control difﬁcult: ‘The sources [of bullion] were very dispersed … The discovery of the ‘placers’ in California, about which there was talk on the eve of the 1848 Revolution, did not change the situation. What was important was to channel the bullion to the reﬁning houses and its primary destiny, which was the striking of coins.’ Plessis (1985a, p. 212), however, notes that Seillière had interests in San Francisco. Vicat-Turrell and Van Helten (1992) also recount that the Rothschilds in Paris and London invested heavily in the mines discovered during the 1890s: ‘By the time of the late-nineteenth century boom in overseas mineral investments, the English and the French Rothschilds had long had an interest in mining. Mining investment grew out of their involvement in the bullion and silver trade and the smelting and reﬁning of precious metals.’

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looks very much like an ordinary manufactory.’246 Behind this transformation and its accompanying increase in the scale of production lay a strengthening of ties between the reﬁning industry and the Haute banque. Indeed, by the end of the Second Empire, many houses (such as Rothschild or d’Eichtal)247 had their own factories. But other, smaller, banks (e.g. Saint-Paul or Hirsch) also took part in bullion processing, to such an extent that Alphonse de Rothschild noted in 1868 that it was difﬁcult to say exactly how much metal was melted over any given time, for there were in Paris ‘a number of reﬁning plants … whose work cannot be ascertained.’248 Technical considerations were at the origin of this change. During the 1820s, decisive advances were made in bullion reﬁning. Several chemical engineers patented processes for separating more effectively the gold and silver always found mixed together in ores. This made it possible to make gilt silver render up the particles of gold contained in it. The cost of the operation being very small, it was more than offset by the proﬁts from remelting. Since all the écus issued during the 1820s before this technical progress contained a residue of a one-thousandth part of gold, the reﬁners found themselves contemplating a huge new market.249 But, to maximize proﬁts, each reﬁning shop needed easy access to the money supply. It was in the best interest of the reﬁners, the industrial partners in the operation, to get on well with the major bankers, who would provide the metal. Economies of scope, which rely on the complementarity of two activities that prove to be more efﬁcient pooled than separated, were thus responsible for driving this transformation. Mention can be found of cooperation during the 1820s between the Banque de France and the Director of the Paris Mint. But the best example is probably the story of the alliance between Poisat and the House of Rothschild. In 1828, Michel Benoît Poisat had along with a certain Caplain set up a reﬁning business. In 1833, Caplain was replaced by another associate, Saint-André. The business

246

Seyd (1868: 185).

247

D’Eichtal placed 415,000 francs worth of orders with Barré (Plessis, 1985a, p. 217).

248

Archives Rothchilds Correspondence Matières, letters from Alphonse de Rothschild, 19 May 1868. According to Baron Thénard, there were only four reﬁners working in Paris in the late 1820s (Thuillier 1983: 271). The reﬁning shops in the Bourse district provided material for some of the most famous pages in Zola's L’Argent (Zola 1891). His Carnets d’Enquêtes (Zola 1987) contain preparatory sketches.If gold is worth less in Berlin than in Madrid, [the money changer] buys as much of it as possible there to resell it here. This is an arbitrage which enables him to make the difference between the two prices. But the difference is imperceptible, a thousandth of the price, so that he has to buy a large quantity to make a proﬁt. He wins by playing on a grand scale. At Hirsch's, six million are handled every day and the proﬁt is a few hundred francs … Upon arrival, the coins are counted and weighed. Then they are taken down to the basement and put into zinc-lined chests. Chests full of gold. Then they are shovelled out and placed in crucibles. The metal is poured into ingot moulds. The weight of the ingots is calculated so that a person cannot easily make off with one but they can still be handled comfortably. They look like rectangular paving-blocks. Arbitrage consists in buying coins whose value is falling, melting them and reselling them as ingots.

249

According to Thuillier (1983: 266), the reﬁning of the thousandth part of gold returned 1.75% (per silver franc reﬁned), from which expenses had to be subtracted, leaving a proﬁt of 1% (sometimes less if the coin was badly worn). We calculated above (Chapter 4) that the re-melting involved 84% of the coins struck before 1830. The operation thus brought in a total proﬁt of approximately 20 million francs.

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ﬂourished and attracted the attention of the Rothschilds. The Rothschilds, thanks to their mines in Almaden, Spain, held a leading position in mercury, which was essential for reﬁning both silver and gold.250 Back in 1827, James de Rothschild had already joined with other partners in founding a company ‘for remelting metals’.251 But his encounter with Poisat turned out to be the starting-point of a long relationship. In 1835, he set up Poisat near the Canal on the Quai de Valmy in Paris in more extensive premises.252 This informal association was ofﬁcialized in 1838 by the creation of a partnership (société en commandite), with a capital of 434,534.66 francs.253 While the extraction of gold particles from silver écus had been the initial reason and point of departure for the alliance between bankers and reﬁners, it was later replaced or supplemented by other work vital to international arbitraging. The Rothschild archives reveal that the workshops on the Quai de Valmy quickly became a transit station for metal on the way from one country to another. During the 1850s, that was where the gold from Australia and California was puriﬁed and processed before being taken to the Mint and coins from France, England, America, Russia were, according to year and circumstance, melted down. James de Rothschild from his headquarters on Rue Laﬁtte knew at all times the state of the factory's order-book and the speed with which it could do a particular job. This enabled the bank to calculate in advance the cost of an operation (since it was in control of the time factor) and from that how high it could buy or how low it could sell. In 1857, Joseph Gadala Saint-André took over from Poisat (who from then on became closely involved in the bank's ﬁnancial activities) in running the Rothschilds’ workshop.254 Meanwhile, the Rothschilds expanded their reﬁning work even further by swallowing up other smaller concerns. In particular, in 1869, they bought the Martin ﬁrm from the

250

See Thuillier (1983: 297, 315) and B. Gille (1965: 414). Also Vicat Turrell and Van Helten (1992: 201), who quote an article in the Mining Journal (1 January 1876): ‘The fact is that the quicksilver trade is virtually in the hand of the Rothschilds who have, it may be said, the direct control of all present sources of supply, except the Austrian mines of Idria.’ According to Gille and Thuillier, the Rothschilds kept control of this market until the Almaden mines were nationalized by the Spanish government in 1929. These assertions possibly need qualifying, since we do not know whether the Rothschilds owned the New Almaden mines near San Jose on San Francisco Bay. These had been discovered in the mid-nineteenth century and were used for reﬁning the gold from California.

251

See B. Gille (1965: 380), and Thuillier (1983: 268 et seq. ).

252

B. Gille (1965: 379).

253

Archives Rothschilds 132 AO 86. B. Gille (1965: 379) claims that this ‘regularization’ did not take place until 1845. The papers consulted leave no doubt, however, that the date was 1838. The most likely explanation is that Gille is referring to a later document, or that he is mixing this contract up with the 1845 one concluded between the bankers and the Paris Mint. The companies set up by the Rothschilds for reﬁning and coin-making were generally given short lifetimes, so that the bankers could pull out if proﬁts evaporated. It is thus possible that the Poisat limited company agreement was amended or renewed in 1845.

254

Afﬁnage et Métaux Précieux, Archives Rothschilds 132 AQ 86. The company Gadala Saint-André was ﬁrst created to last 9 years. Even before the death of James, Alphonse was in charge of the bank's bullion business. That he was also the designated successor is a good indication of how important these affairs were to the bank. After James's death, the bank hired a mining engineer, Jules Aron, whose signature begins appearing regularly in the Matières correspondence from the 1870s onwards. Vicat Turrell and Van Helten (1992) recount that Jules Aron, who would become the architect of the Rothschilds’ investments in South Africa's gold mines, remained at his post until the end of the century.

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reﬁner Raphaël, who spread his activity between London and Paris.255 We know also that in the early 1870s the Rothschilds signed temporary ‘reﬁning agreements’ with Raphaël for carrying out set contracts.256 There were occasions when bullion reﬁning bottlenecks made cooperation proﬁtable. Cooperation was not restricted to Paris; it could extend to other markets via ‘natural’ links between the Paris House and its London counterpart, N. M. Rothschild. In 1851, the British government actually rented the Royal Mint's reﬁning plant to Anthony de Rothschild.257 Seyd wrote in 1868, ‘There are four of ﬁve large Reﬁneries in London, which almost exclusively share between them the Reﬁning of Banker's Bullion. Two of these establishments are worked in connection with eminent Foreign Banking Firms.’258 Again in November 1886, the bullion broker Pixley said that reﬁnable metal was usually taken to Messrs Rothschild or Raphaël whom he praised as two of the greatest reﬁners in the world and two of the best in London.259

Coining Gradually, then, economies of scope pushed reﬁning into the sphere of international banking. The process did not stop there; it went on to include coin-minting. Contrary to the conventional (and as usual poorly informed) wisdom according to which the rule of free enterprise was much more developed in England than in France in the nineteenth century, coin-making in France, until the late 1870s, was entirely in private hands. It was only in 1880 that money manufacturing was placed under State control. Beforehand, it had been governed by a system known as ‘régime de l’entreprise’ (free enterprise system). The mints in Paris and the provinces were farmed out by the government to private entrepreneurs, called ‘production directors’ (directeurs de fabrication). This was in contrast with England where heads of production were civil servants. In France, the directors were required to pay a deposit meant to serve as a guarantee or collateral. They were placed under the supervision of a regulatory body responsible for assays and research and development, the Commission des Monnaies. The Commission charged the production directors for assaying expenses. The government also set the price at which the production directors took in bullion (the Mint price). Government approval was ﬁnally required for the introduction of radical technological changes. These restrictions aside, the directors were free to organize themselves as they liked; for instance, they were free in negotiating with their clients to grant reductions in the ofﬁcial tariff. The proﬁts made by the minting-shops was theirs to keep. The aim was both to stimulate competition by allowing the directors some leeway in the prices they charged and to protect small customers by ﬁxing a ceiling on these prices.260

255

Concerning the House of Raphaël, see Note 9 above.

256

From 1870 to 1872, Archives Rothschilds 132 AQ 86.

257

Craig (1953: 318).

258

Seyd (1868: 185).

259

Royal Commission on Gold and Silver (1886: 10).

260

According to Humann, the lowering of the Tariff on gold and silver coins in 1835 merely gave ofﬁcial sanction to the reductions which the directors routinely granted as a result of the drop in their production costs as compared with 1803. On the set-up of the Mint Administration under Napoleon, see the excellent book by Jean-Marie Darnis (1988). Darnis writes, ‘The bullion market had its organized circuits, often open to only a minority of suppliers or bankers who were privy to the administrative underground of secret short-cuts or connived among themselves to impose their prices.’ Other interesting references may be found in Guy Thuillier's book (1983). An important inference of these practices is that the minting costs reported in Chapter 2 are valid more as estimates (or upper limits) than strictly accurate ﬁgures.

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Until the ﬁrst years of the reign of Louis-Philippe, the mints had usually belonged to regional merchant–banker dynasties. These families had discovered that a minting concession could be of beneﬁt to them in running their affairs. They sometimes succeeded in having the privilege passed on from one generation to the next. This was the case in Bordeaux from 1809 to 1859, in Lyons from 1803 to 1823, in Marseilles from 1824 to 1839, and in Rouen from 1786 to 1820. The records show that the provincial directors were almost always connected with the commercial or industrial upper middle class of their locality. Alexandre Beaussier, director of the Lille mint from 1816 to 1840, and Alfred Renouard de Bussière, director of the Strasbourg mint from 1834 to 1860 before being appointed head of the Paris Mint, were respectively connected with the textile industry in the North and the East of France.261 The situation changed radically during the 1830s. One reason was that the remelting of the gold-containing écus had concentrated the minting-shops’ metal provisions in the hands of the reﬁners. Once the écus had been stripped of their thousandth part of gold, they had to go back through the stamping-machines. This meant that a large part of the silver reaching the mints was supplied by the reﬁning plants. Furthermore, since certain processes involved in preparing metal for melting and for minting were inter-linked, it made particularly good business sense to couple the making of coins with their chemical treatment. Reﬁning and minting were, as Baron Thénard remarked in 1820, two industries that gained from being associated. ‘Each director in his currency circumscription,’ he wrote, ‘will have a great advantage over his rivals (where reﬁning is concerned). For him, no or very little overheads, no travelling to do. He will be both reﬁner and manufacturer. The reﬁning of specie and its production are so related that they always generate more proﬁts united than they do when separated.’262 On top of the economies of scope that favoured an integration of minting and melting came economies of scale in coin-making. The effect of these economies was to concentrate minting in a limited number of workshops. The economies of scale grew steadily throughout the century. At the beginning, the government had assumed most of the ﬁxed costs (primarily plant and premises) and left operating expenses, which

261

See Fohlen (1956: 112)Alexandre Beaussier came from a family of traders. His forebear, Beaussier-Mathon, a merchant in Lille during and after the Empire, was the typical Restoration period businessman. Alexandre Beaussier moved seamlessly from trading to banking, ﬁrst via the directorship of the Lille Mint, and then that of the Banque de Lille, founded in 1836 … In the Strasbourg group, the Renouard de Bussière family played an important part. Alfred Renouard de Bussière, the son of Paul, had married the daughter of P-J. Franck, a Strasbourg merchant banker, and took over from his father-in-law in 1827. A protestant (his family hailed from Yverdon in Switzerland) and Orleanist, he also took an interest in the everyday transactions of local textile and other businesses.A. J. Beaussier headed the Mint of Marseilles from 1852 and 1858.

262

Thuillier (1983: 271).

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were roughly proportionate to output (dies and inspection costs which the director was required to refund to the State, bronze for alloys, workers’ pay).263 Even so, the wear on machines (stamping presses, rolling mills, blank-sizers, etc.), which the minters had to replace, along with the guarantee deposit required of directors,264 made it highly desirable to mass produce, since that made it possible to reduce the burden of overheads. By entering into alliances with the bankers, Mint directors were assured of a constant ﬂow of business, and could afford to cut their costs. The minting shops were thus led to seek ways to enlarge the scale of their production. While statistical information on the size of scale economies is difﬁcult to come by, there is evidence that they loomed large: for instance, a report by Collot and Dumas in 1840 mentions the ‘huge proﬁts which the mint directors have garnered whenever they have had enough metal to ensure a continuous ﬂow of production’.265 By the end of the 1840s, the movement towards concentration in coin-minting was well under way. Nearly the whole of production was carried out by six workshops (in Rouen, Lille, Lyons, Bordeaux, Strasbourg, and Paris). The others began to lose business and fail. The director of the La Rochelle mint went bankrupt; the director in Marseilles was ruined.266 The process was accentuated by several related factors. Improved and cheaper transport made it easier to centralize production. Whereas beforehand each director held a virtual monopoly over his currency circumscription and could be sure of a minimum amount of activity, the country's growing economic integration and the standardization of bullion transport routes (which followed the rail network) made it unnecessary to preserve a multitude of workshops. Only those strategically placed to take in metal from abroad had a chance of surviving. The others had to close.267 A second factor was the structural transformation occurring in France's payment system. Until 1848, the large number of banks of issue existing in France had enabled debts and claims between French regions and foreign countries to be settled by bilateral movements of specie, minted in the provincial workshops. Local bankers regularly took in bullion, which had to be turned into French money. As the Paris marketplace grew in importance and the Banque de France became the sole bank of issue, the system

263

Most had a second job (with a goldsmith or a smelter); the Director would call upon them according to his workshop's needs (Darnis 1988: 70–1).

264

In 1803, the surety payment was 100,000 Livres for Paris, Lyons, Marseilles, Bayonne, and Perpignan, 80,000 Livres for Bordeaux, Toulouse, Rouen, Lille, Nantes, and Pau, and 60,000 Livres for Montpellier, Strasbourg, La Rochelle, Limoges, Metz, and Orléans (Darnis 1988: 109). Although the payment was later denominated in francs, the sums do not seem to have changed. In 1879, the guarantee deposit for the Bordeaux mint was 60,000 francs (Le Droit, Journal des Tribunaux, 10–11 February 1879).

265

Quoted in Thuillier (1983: 306).

266

Thuillier (1983: 283).

267

This was what Delebecque, director of the Strasbourg mint, was implying when he declared in the 1860s that the four minting houses essential to the country were: Paris, the principal bullion market; Strasbourg, for trade with central Europe; Lille, for business with England; Bordeaux, for dealings with the Americas. In the 1870s, however, Delebecque, when nominated to head the Bordeaux mint, tried to obtain the directorship of Lille, which he considered to be more proﬁtable. Lille would, in his mind, enable him to intercept the gold travelling from England to France (Archives of the Paris Mint, Series O, and Réponses aux Questions de la Commission d’Enquête sur les Principes et les Faits Généraux …, 1866, Strasbourg).

138

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inevitably changed. This profoundly modiﬁed relations between minting houses and their clients. To pay for imports, it was often more advisable to go through Paris, which had a vast and efﬁcient apparatus for performing international settlements, and transfer funds through the Banque de France. Once this happened, the international banks—specialized in making payments and advances among the capitals of Europe—took over as the main sources of supply for the minting works.268 The ﬁnal factor was the invention of the steam press. Its French version, a model devised by the engineer Thonnelier, was unveiled in 1834. It was not until 1845, however, that the Thonnelier press was actually used in production. Some authors have argued that the steam press largely dominated the existing screw presses in terms of quality (Redish 1995, 2000). Such was not, however, the majority view among contemporary French observers, in both the Administration and the minting business, where the steam press reaped praise for its speed of operation. It was reportedly more expensive but much faster than the old machines (see e.g. Darnis 1988). With it, a single minting-shop could turn out enough coin for the whole country. The debate on the steam press thus became inevitably mingled with that of the costs and beneﬁts of centralizing the production of coin on a national scale. By the late 1830s, the Haute banque had thus, by its investments in coin-reﬁning and its role in international bullion transfers, acquired the wherewithal to enrich certain minting houses and ruin others. The government became alarmed at the possibility of a monopoly situation arising in coin production. The debate erupted in the early 1840s when the government, to ward off this danger, conceived the idea of nationalizing minting and concentrating it in Paris.269 The plan, debated in 1843 in parliament, was ﬁercely but not surprisingly opposed by Poisat, by then an MP. It was eventually dropped because of the steep cost of the reform and the political obstacles it raised.270 Centralization would have created an unfair situation between metal providers located in Paris and those living in the provinces, who would have had to bear the cost of coin transport since the government was unwilling to pay for it. In the end, nothing was decided. It appears that the Mint Administration had hoped that its power to grant and take away concessions and its right to set and change the Tariff would be enough to curb the monopoly trend or at least counter its adverse effects. The Commission des Monnaies, as a result, was led to hold back the technical modernization of the minting shops, refusing to equip directors with steam presses, for fear of privileging some houses.271 Underneath the polemics could be discerned a certain disquiet regarding the

268

The drastic change in the bullion routes, which took coin manufacturing away from the regions, is such a striking phenomenon that it is surprising that nobody apparently has paid attention to it so far.

269

On this period, see H. Say (1843) and, of course, Thuillier (1983). As Thuillier points out, there were already fears that the House of Rothschild might acquire too great a hold over the bullion trade. People spoke of the threat posed by ‘a certain big capitalist who wished to monopolize the trade in gold and silver materials’.

270

Previous currency reforms had always proved to be very expensive, leading the government to be somewhat wary of them (Petit 1972).

271

Thuillier (1983: 278) relates that Collot, Director of the Paris Mint, complained in 1842 that the Mint Administration had never allowed him to do the work needed for installing the steam press.

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tightening grip of the Haute banque over the ﬁeld of money-minting. But as the trend towards centralization was driven by economic forces, it was bound, in the absence of decisive government action, to succeed eventually. That would occur soon, in 1845. Let us return to the Rothschilds. In 1829, they had formed an association with de Cambry, director of the Rouen mint, to whom they brought the silver, which they had had reﬁned in Paris.272 Again, in the early 1840s, they established ties with Dierickx, who directed the Lille mint. The two cities had the merit of lying on the international bullion route. Lille could act as intermediary between London and Paris, or as a way-station in operations with Belgium or Holland. Rouen was then a place of transit for deliveries from England. (The train went as far as Rouen, then Le Havre, from where ships sailed for London or Southampton.) Rouen had the added advantage of being close to the French capital and the Paris market.273 In this way, the Rothschilds could ‘work around’ the Paris Mint which, until 1842, was directed by one Collot. Collot, probably owing to the exceptional position he enjoyed by having direct access to the Paris market, appears to have preserved his independence as regards the Haute banque at least for a while. The less privileged directors of Rouen and Lille, on the other hand, were more liable to seek backing. As Fig. 6.1 shows, the shares of Rouen and especially Lille started to soar in the late 1830s and early 1840s. As of 1841, the two mints were accounting for almost the entire output of coins, which were then mainly silver. The true steam engine was the Haute banque. In the early 1840s, Collot was ﬁnally relieved of his functions (ofﬁcially for mismanagement, but back-door pressure might have played a role). A replacement had to be found. Cambry obtained the concession.274 Two years later, Cambry died and Dierickx became the new head of the Monnaie de Paris on the Quai de Conti along the Seine. With Dierickx at the helm, the Rothschilds effectively took possession of the Paris Mint. On 17 June 1845, an ‘association for operating the Paris Mint’ uniting the banker and the director was formed, and the company's capital was brought up to 300,000 francs. The Mint's plant was upgraded and the ﬁrst steam presses were installed. The Rothschilds’ association with the Paris Mint, which would soon put all the minting shops

272

Baron Thénard's report conﬁrms that, during the 1830s, the Rouen mint worked on ingots that had already been reﬁned in Paris, no doubt in Poisat's establishment. Mention should also be made, concerning the Rothschilds’ investments in coin workshops, of the limited company agreement concluded in 1832 with Charles de Brouckère, the new Director of the Brussels Mint. Belgium, following its independence, had organized its coin-minting on the same lines as France. French money was legal tender, moreover, in the new Kingdom. The Belgian money supply, in fact, consisted largely of French coins, this system being cheaper than striking new ones. The result was a low level of activity for the Brussels Mint shop. Until 1835, it turned out no more than a few tens of millions of silver francs. In that year, Charles de Brouckère left the Mint and (again with the help of James de Rothschild) created the Bank of Belgium. The Brussels Mint continued to maintain relations with the Rothschilds. The Allard bank, which ran it from the 1860s and possibly earlier, had ties with the Lambert bank, a member of the Rothschild network (see below). Allard was to become after 1873 a prominent leader of the bimetallic lobby.

273

Archives Rothschilds 132 AQ 86.

274

There is no record of a formal contract between him and the Rothschilds who, given the accusations being levelled against them, probably did not wish to draw attention to themselves. It is nonetheless highly likely that their cooperation with Cambry was very close.

140

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Fig. 6.1.Share of each minting shop in the production of 5-franc écus 1829–52

Source: Author's calculations from Gadoury (1989). too far removed from the specie circuit out of business, to a large degree achieved the centralization, which the French government had not dared to introduce. Cooper (1988) recounts an attempt to reopen the Marseilles mint during the 1850s and introduce the steam press. The fact that the affair fell through is evidence that the workshops’ survival was more than a matter of technology. The steam press could conveniently reduce costs, provided a heavy production ﬂow was maintained. Indeed, when Dierickx moved from Lille to Paris, Lille's share of national coin production plummeted from 70 per cent in 1845 to 20 per cent in 1846, while Paris rocketed in the opposite direction, from 20 per cent to 70 per cent.275 It is not hard to understand what had happened. Under the draft statutes of the company, each ‘associate’ had a half-share of the business and its proﬁts. But the 50–50 symmetry stopped there, for Dierickx's prerogatives were strictly limited. He could not buy bullion abroad without the Rothschilds’ permission and, in France, he could buy it only on behalf of the company. His transactions with clients other than the Rothschild bank were restricted to taking in metal ‘across the counter’ at the government-set price.276 The bankers also saw to it that

275

It is incorrect to say (as Gille and Thuillier do) that the Rothschilds ‘collared the supply of all the bullion required for minting’. The statutory obligations of the minting shops commanded them to take metal from any bearer under the terms set by the Administration. The contract between Dierickx and the Rothschilds only prohibited purchases and sales of bullion on the Director's own behalf.

276

Dierickx kept charge of the Lille Mint. He alone was thus responsible for about 90% of total French mint output.

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they were granted a ‘most-favoured customer’ clause under which they automatically beneﬁted from any special treatment accorded to another provider of metal. The Rothschilds had taken every precaution to protect themselves from possible competition at home and abroad. There is good evidence that the relations between the Rothschilds and the Mint directors working were not equally weighted. Mint directors were virtually Rothschild employees, in that their participation in the international arbitrage network was entirely organized by the bankers.277 To conclude this section, it is possible to give a lower bound of the gains which the addition of the Paris Mint brought to the Rothschilds arbitrage network. It leaves out of account the earnings from the competitive advantage the Rothschilds held in other international operations as a result of the favourable terms accorded to them by the Paris Mint. From 1845 to 1860, the striking of gold coins, for the most part in Paris, amounted to 4.5 billions’ worth of francs which, at a net margin of 1–1.5 per cent (a number discussed in Appendix H), would have brought in a quite tidy proﬁt, of the order of 4.5–6.75 million francs. To this ﬁgure, we should add at least a portion of the 8 million in premiums paid by the Banque de France for the gold purchases in which the Rothschilds acted as middlemen (Chapter 5). We are probably looking at a net proﬁt of around 10–15 million. Arbitraging international bimetallism was clearly good business.

2. THE GLOBAL ARBITRAGE SYSTEM: ORGANIZATION AND OPERATION In operating the global arbitrage system, international bankers were required permanently to reallocate their resources, skills, and assets. Given the monetary tensions, which they observed ﬁrst-hand in various parts of the world, and the location of their own and their correspondents’ assets, could these be reapportioned in such a way as to generate proﬁts? If so, what method of doing so would bring in the maximum gain? Relying on the market and contracting out the different arbitrage operations? Using the bank's own networks? There were, of course, all sorts of blends of these different choices, one being the gradual establishment of a ‘house’ intermediary to take the place of a subcontractor. The ﬂexibility of the arbitrage network and its plasticity were thus the key ingredients of success. This may sound paradoxical given what we have said about economies of scope and scale and the resulting concentration of coinmaking in a single workshop. Yet this phenomenon was not incompatible with mobility, or a reshaping of the geography of arbitrage, as the ‘loss’ of the Paris Mint would quickly show.

277

See, for instance, this letter from the Rothschilds to Delebecque, then Director of the Strasbourg Mint, asking him to draw up a provisional account for a future minting operation so as to keep them a step ahead of the competition (letter of 25 August 1868, Archives Rothschilds 132 AQ 891 et seq.):[To Monsieur Delebecque in Strasbourg]. We have learned that quite large consignments of Maria-Teresa Thalers, with a probable assay count of 832, from the Abyssinian expedition are being negotiated in London. We should like to know at exactly what price you can take them in at your Mint. You will, needless to say, draw up your account with the utmost care so as to provide us with terms such that we need not fear competition. We should be very pleased to take advantage of these circumstances to (further?) [barely legible] our bullion business. Yours most sincerely.

142

SCALE AND SCOPE

Late in the 1850s, Dierickx fell ill and in 1860 he died. While Henri Archange Delebecque (who had looked after the Paris Mint during Dierickx's illness) acted as temporary head of production, the government searched for a successor.278 The House of Rothschild naturally had its own hand-picked candidate in the person of J-B. Harold Baron Portalis, a politically correct Bonapartist senator seemingly without knowledge of coinage, and a contract was ready.279 However, as the Moniteur of 3 November 1860 reports, the prize went to Baron Renouard de Bussière, Director of the Strasbourg mint, who was a partner of the Péreire brothers. The Rothschilds had lost their control over the Paris money-machine. Rothschild Frères were not so easily beaten. Straight after the appointment of de Bussière, Delebecque wrote to the Chairman of the Commission des Monnaies, Pelouze, asking to be given charge of the Strasbourg mint. The mint in Strasbourg, he argued, had special importance for him. It was of great practical interest for transactions with Germany, which involved dispatching gold to France. It was also well placed for intercepting gold arriving from Russia, which produced a considerable portion of world output and its share had been steadily rising in the late 1850s (Fig. 6.2). Delebecque's request was accepted. The Rothschilds probably paid the new director's deposit of guarantee, a further indication, if one was needed, that it was they who were running the show.280 Gradually, the Alsatian mint shop's share of production grew, at the expense of the Paris Mint, reaching 65 per cent of the national output of gold coins by the end of the decade. The remarkable speed with which the Rothschilds were able to recover

278

Archives de la Monnaie, Series O, Affaire Delebecque.

279

Archives Rothschilds 132 AQ 86. Pinaud (1983) gives details: Portalis, grandson of Napoleon I's Minister for Religion, was born in Paris in 1810. He had had a standard career in the Treasury Department, becoming Receiver-General for the Haute-Saône in 1840, the Hérault in 1846, the Loiret in 1849, and Seine-et-Oise in 1856, before being promoted Paymaster-General of Seine-et-Oise in 1866. The Receivers-General, who were ﬁnancial agents for the State, used their position as tax collectors to take part in the arbitrages of the 1850s. They agreed, for a premium, to sell to the bankers the stocks of silver which the public had remitted to them as payment (see the monetary enquiries of 1857 and 1868). This does not, however, fully explain why the Rothschilds (or the government) considered appointing a director who had no experience in currency technology. The Rothschilds probably expected that the social standing of a Baron of the Empire (whose father was a Peer of France and Second Empire Senator in 1852) who had been awarded the Légion d’Honneur in 1859 would placate authorities. In any case, there was always the possibility of seconding him with a right-hand man (such as Delebecque) who knew all about coin-minting.

280

At least, we know that the Rothschilds paid Delebecque's deposit when, after ﬂeeing Strasbourg in the face of the German invasion, he took over the Bordeaux Mint. Delebecque presented himself later as a protégé of the Rothschilds. (Archives Monnaie de Paris, Series O, Affaire Delebecque ). The capture of Strasbourg by the Germans left Delebecque with a dead loss of half a million. He arrived in Bordeaux with 60,000 francs in his pocket. The new post was less lucrative and would ﬁnally cause his downfall. In the late 1870s, after embezzling a number of the Rothschilds’ ingots, he was sentenced for fraud. The judge admonished him, ‘In Bordeaux as in Strasbourg, your lifestyle was ruinous and you ﬂaunted an imaginary fortune. You had two carriages, four horses, six servants and entertained with incredible lavishness.’ To which Delebecque replied, ‘My trade [in Bordeaux] ought to have earned me more than 40,000 francs on the basis of my experience in Strasbourg.’ (Le Droit, Journal des Tribunaux, 10–11 February 1879). Curiously, the Rothschilds sued the government as being responsible for Delebecque's fraud. The irony was that the government took advantage of the ‘Delebecque case’ to eventually nationalize Mint production.

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Fig. 6.2.Share of each minting shop in the production of 20-franc napoléons 1845–70

Source: Author's calculations from Gadoury (1989). from the blow of losing the Paris Mint helps to understand that their true asset was their ability to redesign, almost at a moment's notice, the arbitrage routes. The Matières register provides evidence of the Rothschilds’ obsession with ﬁnding the cheapest, most effective routes.281 In their arbitrage notes, we ﬁnd that the bank continually surveyed not only the choice of routes, but also the terms proposed by alternative carriers: the ‘Messageries Maritimes’ or a Lille trading-house; transport by rail or by ‘accompanied mail’ (a messenger travelling with some solidly made chests). A transaction with the House in Vienna is inscribed with the note, ‘expenses counted by S.M. de R[othschild], we can do better’. The bankers, in a letter to the House in London, worry that one reputedly unproﬁtable arbitrage was nevertheless carried out by a rival. What could have been the reason? In the same letter, they write, ‘Even if operations result in par [i.e. zero proﬁt], we think they should be done, because that keeps business moving.’282

281

132 AQ 86. See Chapter 2.

282

Letter of 4 March 1874, Correspondence Matières. It seems that Rothschild Frères had asked the House in London to be allowed by the Bank of England, which traded napoléons by weight, to buy worn and therefore less expensive coins for resale at their face value in France. ‘Perhaps that was where the advantage lay for Messrs Montagu to make several shipments of gold which to us appeared unexplainable given the exchange situation, for there is obvious proﬁt in receiving in London light-weight coins [by the kilogram] whereas we receive them at par.’

144

SCALE AND SCOPE

It is interesting to trace the pattern of international bullion movements as revealed from the Rothschilds’ correspondence on the shipments of ingots or specie.283 The letters dating from 1857 are intact. From them, the geography of gold and silver ﬂows among the network ‘hubs’ can be tracked from day to day, and it can be seen how the network was used to operate international bimetallism. The so-called Copies, which are on ﬂimsy paper and risk becoming completely illegible, cover the period 1857–78. They concern various activities, whose apparent confusion results from their having been classiﬁed in chronological order. But when sorted out, they lead to an understanding of the logic of the arbitrage system. Certain transactions occur irregularly; they are one-off arbitrages. Others reﬂect vaster enterprises, with repeated, almost continual operations. For quite long stretches of time, they dominate the Rothschild bank's bullion business. Two series of letters are of particular interest. The ﬁrst is a long series of letters written in German and addressed by the House in Paris to the House in London.284 Over the period 1857–60, they were closely spaced, but they became fewer from 1861 to 1865, after which they ceased altogether. This correspondence, bearing the note Geld und Silber in the margin, is supplemented by another set of letters (in French or English) written to the correspondents on the bullion route who had to intervene at certain stages of the operations. Alongside these ‘British’ letters, there is a second, more Continental, set. They call into action the Rothschild network agents in Brussels, Vienna, and Berlin. These letters became frequent from 1860 onwards. The Geld und Silber letters follow a pattern, which needs to be placed in the context of the exchange situation described in Chapter 3. The period running from 1852 to 1865 was marked by cross-directional ﬂows of gold and silver, the former entering France and the latter leaving it. Both operations were performed using exchange rate arbitrage. The letters between N. M. Rothschild and headquarters in Rue Laﬁtte provide an account of the practical dealings that underlay the process. At one end, the House in London bought gold originating in the United States or Australia on behalf of the House in Paris. For this purpose it dealt through City bullion brokers, who announced gold shipments arrivals in advance.285 The transaction was often completed before the ship entered the Thames Estuary. The House in Paris then bought the quantity of gold, which it was

283

Correspondence Matières, references 132 AQ 891–899 in the National Archives, Paris.

284

German was, along with French and English, one of the bank's ‘ofﬁcial’ languages. Yiddish was also used to improve secrecy. The Matières correspondence is written mostly in French and only occasionally in English.

285

See Gille (1967: 278). The bullion brokers, whose role is described in detail by Seyd (1868: 249), were central ﬁgures in the bullion market's operation. Their work included giving news about the arrival of ships and their cargoes, storing the bullion, and trading it. Pixley, Abell & Langley, one of the City's foremost bullion brokerage ﬁrms (founded in 1852), published a weekly circular which The Economist reprinted. On 19 November 1859, we can read,Gold.—The 24,700l gold brought by the Delta and Armenian, as mentioned in our last circular, was taken for the Continent. The demand for exportation has, however, up to the present time, been met by the following arrivals:—The Bremen, and Hammonia, all from New York, bringing together about 150,000l. The Red Jacket and Swiftsure, from Melbourne, with about 460,000l are not yet in [etc.]. Silver.—The price remains the same, 62 per oz. standard, but we do not consider it ﬁrm. The outgoing mail to Calcutta will take out about 250,000l.

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proﬁtable to acquire at the going rates of exchange between the two capitals, and had it shipped to France. As a rule, the gold was sent via Le Havre, where the Rothschilds’ representative, Troteux, took charge of its delivery to Paris, or via Boulogne, whence it was forwarded by the ﬁrm of Lebeau, a specialist in bullion transport from London.286 The coins, especially the Eagles whose gold content was known, were usually taken directly to the minting shop in Paris. Ingots, which contained a certain amount of silver, were ﬁrst sent to the reﬁning works.287 There they were made ready for sending to the Mint to be coined. This golden ﬂow crossed paths with a moon-coloured one. While the gold came in, the silver went out. It was sold for drafts on London used to pay for imports from Asia (India, China, or Japan). Here the roles were reversed—the House in Paris worked at gathering up the écus and the House in London ‘bought’ them, acting as an intermediary for the ﬁnal buyers, often Anglo-Indian banks. These banks, which had advanced money while the goods were being shipped to Europe, received their payment in this way. The metal collected in France travelled to London or Southampton via Le Havre or Boulogne, following the opposite direction of gold, before being loaded on to steamships bound for the East. There were times when the metal, white or yellow, was stopped short of its original destination and brusquely took another route. The House in Paris kept a constant eye on the state of its assets, determining what operation was the most proﬁtable and cabling fresh instructions to its intermediaries.288 A gyration in exchange rates could make it worthwhile sending the ingots to a different market. The bullion switched directions to other suddenly more lucrative investments. France's macroeconomic role as intermediary was thus paralleled by the microeconomic intermediation of the Rothschilds. Thanks to their business position on either side of the Channel, they could steer the clearing of the gold and silver balances by making adjustments in France's holdings. Their London connections made

286

Beginning in 1844, the quickest way from Paris to London was by train to Rouen, and boat from Le Havre to London. The railway between Rouen and Le Havre was inaugurated in 1847. Finally, in 1854, the Compagnie du Nord, in which the Rothschilds had shares, opened several lines connecting Paris with Lille, Boulogne, Calais, and Dunkirk. As B. Gille (1967: 160) notes, ‘The policy for the future was in place. Right from the start, James de Rothschild, as he often said, had wanted to establish the main international connecting routes, not only towards England, but also towards Belgium, Holland, Germany and northern Europe.’

287

See Seyd (1868: 387 et seq. ) for examples of shipments of American gold to France.

288

Bullion shipments were often accompanied by very detailed instructions and information concerning upcoming operations. The agent could thus prepare himself. The ﬁnal instructions sometimes arrived with the cargo itself. An example is the 1857 letter (132 AQ 891) to Monsieur (N. Major) [barely legible], Boulogne-sur-Mer:I am pleased to inform you that on Monday we shall be sending you by the 10 a.m. train R.116 to 282, 67 crates of silver bars worth 900,000 francs which we ask you to ship to our House in London by the 11.55 p.m. boat of the same day. On the 2 p.m. train, we shall make you a further delivery of about 30 crates numbered to follow the 67 mentioned above, but we shall inform you of this on Monday by dispatch. We should like you to send them off on the same boat to the same address. If so required, kindly store them for the time being on your premises until 11 a.m. on Saturday.

146

SCALE AND SCOPE

them privy to gross gold resources and silver needs. Meanwhile, their unrivalled access to the Paris market and the bimetallic money in circulation enabled them to supply the amounts of bullion essential to world equilibrium. As we saw in Chapter 2, silver became scarcer in the north-eastern half of France in the early 1860s and its path to Asia changed, as data reported by The Economist show. (see Fig. 6.3).289 Shipping it from Marseilles, Seyd noted, saved some time, and it was easier to collect there.290 The Rothschilds therefore had to ﬁnd a new agent for the Mediterranean. The one they chose to do the shipping from Marseilles was an ally, the banker Roux de Fraissinet, who was also their importer of oriental silks.291 The metal, in coins or ingots, was rounded up in the region then sold to the Anglo-Indian banks through the Houses in Paris and London. All in all, no less than four ﬁnancial intermediaries were put to work in various parts of the world to ensure the West-to-East commerce. The other series of letters in the Rothschild correspondence concerns the bank's continental network: B. Goldschmidt in Berlin, or the Rothschilds in Frankfurt and Vienna. The operational pivot-point was Brussels, where a Rothschild son-in-law directed the Banque Lambert.292 Until 1861, the network was used primarily for sending écus collected in France to the European countries on the Silver Standard (Holland, Germany, Austria).293 Like India and China, these Silver Standard markets needed to import silver to expand their currency base. Between 28 July 1860 and 17 August 1861 (i.e. in the space of a year), the Rothschilds sent Lambert the astronomical amount of 26.5 million francs in silver.294 From the early 1860s, Brussels became also a place of transit for gold arriving from England for the French market.295 There were several reasons for this development. The ﬁrst was that, during the 1850s, Brussels had experienced considerable growth as a ﬁnancial centre, owing partly to the increased activity of the Bank of Belgium, which managed a large portfolio of foreign assets.296 The Belgian capital had become a

289

These ﬁgures gathered from London probably understate the volume of shipments from the Mediterranean, but the trends indicated are informative.

290

The Suez Canal, which was begun in 1859, would not be opened until 1869. Even without the Canal, the Mediterranean ports were the most convenient points of departure towards the Levantine trading posts. Under the Second Empire, Marseilles experienced a surge of development, probably connected with a rise in imports in exchange for bullion shipments (see Levasseur 1912: Vol. II).

291

See Gille (1967: 550).

292

See Kauch (1950: 100).

293

See letter of 26 September 1857: ‘I am pleased to inform you that you shall be receiving by this evening's convoy … via Herbesthal, BG n 1 to 31 three crates containing silver bars 60,000 francs which I should like you to have delivered to Mr B. Goldschmidt in Berlin.’

294

In comparison with net silver exports in 1861: 62 million francs according to customs records.

295

Until 1853, the Lambert bank's head ofﬁce was located in Antwerp. It was then moved to Brussels and the Antwerp premises became a branch ofﬁce.

296

Remarkably enough, the pool of bankers which assisted the Bank of Belgium in building and managing a portfolio of foreign assets rather than gold reserves brought together all the members of the Rothschilds’ Continental network as recounted by Kauch (1950: 100). This means that the alliance between Goldschmidt and Rothschild dates from further back than is suggested by Bouvier (1967: 231), who writes of a marriage between a Rothschild and a Goldschmidt in 1871. The two families had many things in common, since the Goldschmidts had been reﬁners before becoming bankers (Kindleberger 1993). There is food for thought in this development of the Rothschild Frères’ network, which seems to have coincided with the relative decline of the Houses in Frankfurt and Vienna. We know that the consolidation of the Rothschilds’ ties with Bleichröder dates from the early 1870s.

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Fig. 6.3.Silver exports to Asia (British ﬁgures) (millions of £)

Source: The Economist, 14 March 1868: Vol. 26, No. 1281: 49. full-ﬂedged international exchange market. Belgium, surrounded as it was by countries on different standards and itself bimetallic since 1860, was adjacent to and even integrated with the huge mass of French money, which was legal tender in the Kingdom. It was, in Kreglinger's words, ‘predestined to act as a connecting link in currency transactions among the various countries.’297 In short, it was often advisable to go through Brussels when making international payments. Subsequently, Brussels’ growing role in the House of Rothschild arbitrages could be seen as a direct consequence of ‘loss’ of the Paris Mint in 1860 and replacement by Strasbourg. The bankers had to reorganize their network and the transit chain

297

Kreglinger was at the time Director of the Banque Nationale de Belgique. See the Minutes of the 1865 International Conference (p. 21) which resulted in the creation of the Latin Union. Archives of the Ministry of Finance, Paris (Flandreau 1989; Einaudi 2001).

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Map 6.1.Bullion routes: Rothschild Frères’ network and international arbitrages, 1835–75

Source: Rothschild Archives, see text.

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consequently shifted eastward. The metal was often sent from Belgium by Lambert and received by Delebecque.298 The director of the Strasbourg Mint was increasingly asked to act as a go-between in transactions with Germany, even when these did not involve the manufacture of coins. Delebecque was frequently entrusted with bullion shipments to Berlin.299 It is therefore quite possible that the reorganization of the Rothschilds’ network in the 1860s led them to carry out new operations. A new geographical game-plan meant new opportunities. The Matières correspondence shows that, from 1865, the arbitrages faltered and then changed direction. Here again, the inﬂuence of the underlying macroeconomic forces is perceptible. The price of silver had fallen, the commercial ratio had returned to within a hairsbreadth of the legal ratio, and silver had stopped being exported. Both precious metals were arriving on the French market together. From 1867, for example, the drop in the price of silver brought in several cargoes of Mexican piastres or Maria-Teresa thalers which the Rothschilds sent on to Strasbourg. The Mexican silver travelled in by the same routes that the écus had taken on the way out a few years earlier. As always, the Rothschilds wished to proﬁt from a price difference between London and Paris and used the same intermediaries for reverse operations. So, little by little, silver started returning to France by the familiar Boulogne or Brussels routes.

3. Conclusion Two sorts of conclusions can be drawn from this chapter. The ﬁrst is economic in character; it concerns the interaction between banking networks and macroeconomic adjustments. The movements of specie orchestrated by the Rothschilds enable us to better understand the nature of the monetary system of the time. It must ﬁrst be pointed out that arbitrages were never responsible for temporary disequilibria on the bullion market. The bankers responded to the ‘impulses’ perceived via their networks and, on that basis, optimized the bullion's distribution. This is why the arbitrage system evolved in the course of time, with breaks that matched variations in underlying market tensions, and ‘industrial’ organization. Whenever a new adjustment had to be made (e.g. when gold was more expensive in Paris than in London, and consequently had to ﬂow from London to Paris), the bankers needed to determine—and sometimes invent—-which routes and methods to use. The actual movements therefore depended not only on the perceived disequilibria but also on

298

Letter of January 1864:[from Paris to Monsieur Lambert in Brussels] We are sending you today R 1 to 28–28 crates containing 84 silver ingots to be deposited in two parts. You have received from London $74,667 mexl [i.e. Mexican piastres], which are to be deposited in three parts, and 3,105.19 mexl idem one deposit. On the other hand, we ask you to withdraw the 43 gold ingots and dispatch them as baggage in ﬁve solid trunks with your lad Michel to Monsieur Delebecque, director of the Strasbourg mint. Have him take the same route as the Berlin mail (Mr Franz?) [barely legible] recently by Cologne and Frankfurt. If you feel it necessary to send someone with Michel who speaks German, you may do so. Sgd, de Rothschild.

299

See, for example, the letter of 20 February 1868, in which the Rothschilds ask him to send 240,000 francs to B. Goldschmidt in Berlin ‘declaring half the value’.

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the ‘wherewithal’ at the disposal of the banking networks, which patterned the range of possibilities. The correspondents, their location, their ties with the arbitrage organizer, their professional skills were all contributing factors to an arbitrage's feasibility, cost, and practical execution. Experience of the different markets, as well as their geography and degree of organization, were all-important.300 The technical details and cost of a delivery between Brussels and Paris, for example, were a matter of routine and the most efﬁcient intermediaries were generally well known. On the other hand, where tried and true methods were lacking, the bankers had to devise new techniques, either calling on their usual contacts or establishing new ones. The integrated network—the ‘primitive form’ of international monetary relations—thus preceded, extended, compensated for, and supplemented horizontal market institutions. The way in which N. M. Rothschild, Rothschild Frères, the Anglo-Indian banks, and various Continental intermediaries worked together is an excellent illustration. The Rothschilds subcontracted their dispatches of gold from London to Paris but relied on their silk importer in Marseilles (a partner obviously familiar with payments for Asia) when shipping out silver. Macroeconomics shaped individual responses by transmuting transitory disequilibria into proﬁt opportunities while, in return, the microeconomics of arbitrage networks inﬂuenced macroeconomic adjustments. The factor most inﬂuenced by the quality of banking networks was the swiftness of these adjustments. Fluctuations propagated with great speed among marketplaces interconnected by the densely overlapping webs of the competing international banks (such as the main European centres). The more distant markets were slower to respond and tolerated wider price variations, since the cost of setting up a bridgehead had to be factored in. The second conclusion is of a more political and historical nature. Since the classic article by David Landes (Landes 1956), historians, especially French ones (Bouvier 1961), Plessis (1985b), Barbier (1991), have had a tendency to downplay the importance of the mid-nineteenth-century disputes between the Haute banque (the ‘old’ bankers) and the ‘new’ generation of bankers. The classic example is the struggle between the House of Rothschild and the Péreire brothers. These authors stress, not the conventional opposition between the ‘conservative status quo and the ﬁnance of the future’,301 but the great ﬂexibility of the ‘old’ bankers, their ability to innovate and sniff out opportunities.302

300

To be included with these factors, of course, are ofﬁcial decisions on whether to grant or deny a Mint to a particular network.

301

Landes (1956: 207). Landes writes elsewhere,The conventional interpretation is to see in this rivalry a conﬂict between the old and the new banks, between the established system—private banks, personal relations, conﬁdential operations, old-style investments—and the new one—companies, impersonal bureaucratic organization, industrial affairs launched with more or less fanfare ….

302

Some writers point out that it was not unusual to ﬁnd new and old bankers side by side when a juicy deal was to be made. One of the classic examples is the ﬁnancial support provided by Fould to the Péreire brothers.

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While our analysis conﬁrms this last point—the Rothschilds’ trade forced them constantly to readjust, re-form their alliances, and respond to shifting circumstances, it also suggests that it is fundamentally wrong to treat the conﬂict between the ‘old’ bank and the ‘new’ bank as unworthy of interest. The differences between the two generations were admittedly insigniﬁcant in terms of the uses they made of their funds. With capital to invest, the different banks had to place the money in similar, sometimes identical, ventures, since they all sought the best deals. The transition from the ’old’ bank to the ‘new’ did not therefore have anything to do with changed economic needs.303 Their bone of contention, therefore, was not so much the purpose to which loans were put as the monetary infrastructure on which credit rested and the related question of control over these infrastructures. There, the difference between the two camps was total, and raises echoes of the classic conﬂict between the ‘banking school’ and the ‘currency school’. The traditional bankers held that nothing could match gold and silver for guaranteeing conﬁdence and stability. The ‘old’ bank considered that stability rested on solid reserves and an extensive use of metal currency. Alphonse de Rothschild declared in 1870, for example, that Britain's metallic circulation, proportionately smaller than France's, ‘was in any case inadequate to cope with crises’.304 Given the Haute banque's relations with the bullion market, it is clear that there was more to this than a question of philosophy. Well before the monetary disputes of the 1860s and 1870s to which Part III of this book will return, the traditional bankers had hotly defended the double standard. In the late 1840s, Poisat had already fought suggestions that the minting of gold be suspended in order to beat the threat of inﬂation posed by California. In December 1850, he wrote in the Journal des Débats, ‘I declare at the outset that the demonetization of gold is, as I see it, a disastrous measure.’305 Delebecque, director of the Strasbourg mint, stated for his part that ‘the value of a large monetary circulation cannot be ignored. It is a powerful lever which France's trade uses at all times. It is a storehouse of plenty.’ He added, ‘Given the importance of an abundant circulation, care must be taken not to crimp the means for increasing it.’306 When questioned during the 1865 Enquiry, he said that limits must be placed on the use of paper money in order to ensure its ‘convertibility’ into coin, the only genuine means of payment. Delebecque was of the opinion that loan companies, with their ‘unbridled advertising’, were a ‘veritable danger’ and concluded with obvious

303

In Landes’ ‘neo-classical’ dictum, when the bankers were not looking for investment opportunities, these were looking for them. Along the same lines, Bouvier (1961, Vol. 1: 895) writes (his italics), ‘For a long while, the “new” bank remained highly traditional. The reasons can be seen: it innnovated only in the procedures for collecting resources. It did not revolutionize anything in the tactics for their use.’

304

Enquête sur la Question Monétaire (1870 Enquiry), 1872, Vol. I: 101.

305

With the conclusion that the ‘status quo’—the maintaining of the double standard—was the only ‘good and ﬁtting’ solution. The letter, addressed to the Journal des Débats, 22 December 1850, was a reply to an unsigned letter to the editor the day before claiming that demonetizing gold coins was urgent and necessary. See Poisat (1851: 124 et seq. ). It is perhaps not without signiﬁcance, then, that Poisat was in 1858 associated with the Réunion Financière, a syndicate emanating from the ‘old’ bank which the Rothschilds had put together to combat the Péreire brothers.

306

Archives of the Monnaie de Paris, Series O.

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exaggeration that they had been responsible for a ‘slowdown in saving’.307 Alphonse de Rothschild, for his part, declared in 1870, I am of the opinion that the more precious metals we have, be it gold, be it silver, the better it will be, because there will be more work. Bullion is not wealth, properly speaking, but it is the muscle and fuel of work. The best proof of this is the wonderful development of trade and industry that followed the ﬁnds in California. We owe the great works that are the glory of our day to those goldmines.308 The ‘old’ bank thus had a direct interest in preserving the ancient ways; it was they who had ensured its power and its proﬁts. The new generation of ﬁnanciers disputed its monopoly. This was not to say that the ‘new’ bank was averse to specie; there is evidence indeed that it tried to beat the traditional bankers at their own game. Baron de Bussière, for example, who took over at the Paris Mint in 1860, was a shareholder in the Péreire's Crédit Mobilier.309 The ‘new’ banks’ failure to gain control over bullion probably explains why they were gradually led to attack the metallic philosophy. Not having being able to obtain control over gold and silver, they sought to demonstrate that credit could be separated from it. The universal banks (Mobilier) or the commercial banks were the visible representation of this attempt to circumvent traditional banking. The ‘old’ bank's monopoly could be short-circuited by funding investment with privately held securities or the small deposits of a larger public. The new generation's best strategy lay in its modernity. This makes it easier to understand how the criticisms expressed by the Péreire brothers slowly spread to the entire system. Their challenge was to organize the liquidity of the ﬁnancial instruments, which they proposed as a substitute for bullion. The Banque de France's policies thus came under ﬁre. As Isaac Péreire explained it to the High Council on Trade, The Banque does not like loans on collateral; but it has a very soft spot for loans on ingots. The interest on them is very low, whereas the interest on its loans against public funds, securities and railway bonds is very high. … I confess that I do not understand this preference for ingots, unless it be that the Banque takes in proﬁts without incurring the slightest risk.310

307

H. Delebecque, Réponses aux Questions de la Commission d’Enquête sur les Principes et les Faits Généraux …, Strasbourg, 1866.

308

Enquête sur la Question Monétaire, 1870: 101. Alphonse's statements, by equating bimetallism with economic development, were a tactically clever way of undercutting the proponents of monetary plenty. For a study of the nineteenth-century monetary controversies regarded in terms of the duel between Keynesianism and Monetarism, see C. P. Kindleberger (1985).

309

Plessis (1985a: 303)}. It is more than probable that the government tried deliberately to deprive Rothschild Frères of their Paris minting shop. The government was aware of the ties between the Rothschilds and Dierickx. The 1845 contract stipulated that, in the event of a difference between Dierickx and the bankers, a gentleman's agreement should be sought under the guidance of the President of the Currency Commission.

310

Enquête sur la Banque de France, Dépositions de MM. Emile et Isaac Péreire, 1865 (1866).

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What we discover here is the nexus of vested interests that supported the specie system discussed in the Introduction. The international metallic system, because it used a commodity as basis for payments and operated through the market, could claim that it relied on automatic procedures and thereby minimized political interference. At the same time, it rested on political forces, since it could not have worked without its ofﬁcially approved framework. Each form of economic organization generates its own currency. Bimetallism, the acme of metallism, did not escape from this universal rule. That was perhaps why bimetallism was the Rothschilds’ business.

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III Macroeconomics: Bimetallism's Success and Failure

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7 How did International Bimetallism Work? A Monetary Theory For though the bulk of the new gold comes in the ﬁrst instance to England and the United States—determined thither by the course of international demand—yet England and the United States do not form its ultimate destination. The monetary requirements of these countries being easily satisﬁed, the mass of the metal, on reaching these markets, becomes immediately disposable for foreign purchases; by which means the United States and England are enabled to transfer to other countries this unproﬁtable stock, the commodities with which in the ﬁrst instance they parted being replaced by other which they more require. So also, although the metallic drain to the East is composed principally of silver, the efﬂux … is not the less certainly a consequence of the increased production of gold; for the silver of which it consists has been displaced from the currencies of Europe and America by the gold of Australia and California; and the drain to the East is not a golden one, only because silver alone is in that region the recognized standard. John E. Cairnes (1860) The previous chapters dissected the various pieces of the bimetallic machinery. What remains now is to join together these elements to build a model describing the operation of the international monetary system over the period 1848–73. More particularly, this chapter will endeavour to model the macroeconomic links between France's metallic circulation and variations in global bullion stocks. As argued, stabilization of the gold–silver ratio was achieved though the clearing of the international balances in the gold, silver, and bimetallic blocs. This leads to the question: Is it possible to describe in a systematic fashion the adjustment of France's specie holdings in order to identify the driving forces in the international monetary equilibrium? The issue of understanding the international adjustment mechanism under bimetallism is not a new one. It was intensely debated in economic and policy circles in the mid-nineteenth century. The news of the ﬁnds in California and Australia gave rise to a good deal of worry. Some economists foresaw massive inﬂation (what they called the ‘fall of gold’) and the collapse of the commercial ratio. Michel Chevalier recommended doing away with the double standard and going on to the Silver Standard. Belgium, Switzerland, and Holland went the whole way and abandoned gold. India suspended gold coinage. Only Portugal, a small backward economy with wobbly ﬁnances, dared

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hitch its star, in 1854, to the now dubious metal;311 for it, gold was no worse than paper and at worst, Portugal would follow sterling in its predictable fall. The glut of gold promised all kinds of unpleasant consequences. Time went by, however, and the commercial ratio stood fast. In 1856, while the new mines continued to pour out gold, a contributor to The Economist wrote with puzzlement, that the value of gold ‘ought to have fallen with respect to silver’.312 The expected inﬂationary catastrophes began to seem less inevitable. On the contrary, there seemed always to be customers to take in the surplus metal. No price revolution, then; the metallic revolution, if any, was one of quantity: wholesale minting of gold coins wherever gold played a monetary role. In the meanwhile, silver was ﬂowing out of France. The two phenomena were naturally linked. It was ‘the theory of the displacement of silver by gold’313 or, as Chevalier famously called it, ‘the parachute process’. The departing silver francs bought the entering gold francs. Pushed to its extreme, the doctrine postulated that every bit of gold that entered was matched by an exit of silver, so that the total amount of monetary stocks in the double standard countries remained unaltered. Bimetallism was a zero sum game.314 It is easy to discern, behind this reasoning which was current in the late 1850s, the origins of the later notion of bimetallic arbitrage (see Introduction): every gold franc of excess supply on the bullion market was exchanged for a silver franc drawn from the French circulation. In aggregate, however, this argument shelved rather than solved the problem. The difﬁcult question: ‘What will happen to the surplus gold?’ was merely overlaid by an even more difﬁcult one: ‘What will happen to the surplus silver?’ Just as bad money drives out good, one problem replaced the other. Certain authors thought (e.g. Chevalier 1866), and some still think (e.g. Cottrell 1992), that it is easier to answer the second question than the ﬁrst. In Europe, the 1850s and 1860s were marked by spiralling imports of goods from Silver Standard countries (especially the East—India, China, Japan). These had to be paid for with exported silver. This suggested a simple explanation. The silver area's surplus induced added demand for silver, which departed from the bimetallic countries, enabling them to absorb the excess gold provided by the ﬁnds in Australia and California (Chevalier 1859;

311

See Reis (1996). It must be said that gold was the metal also of Portugal's main trading partner, Great Britain.

312

The Economist (6 September 1856: 977). ‘What has Become of All the Gold?’ The Economist 's mid-century difﬁculties in predicting the effects of the California and Australia gold discoveries chastened its reaction during the next big gold strike, that of the 1890s. As remarked by Barsky and DeLong (1990), The Economist remained on this second occasion fairly conservative and systematically underestimated the effects of this new glut. Seen in the light of the mid-century debate these hesitations are perhaps more easily understood.

313

The Economist (9 February 1856: 144). ‘Export of Silver to the East’.

314

Although the different authors were not always models of clarity as regards the rate of substitution of one metal for the other, the implicit view was a one-for-one rate. According to The Economist (9 February 1856: 144):The theory of displacement of silver by gold in France and America is perfectly intelligible, and is fully borne out by the ascertained facts of the case. In these countries there is no alteration, arising from the circumstances of the case, in the gross amount of coin circulating within their limits: there is merely a substitution of one metal for another.

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Laughlin 1896). This view, in short, posited the essentially exogenous character of international trade ﬂuctuations, which were taken as being the main factor driving international specie ﬂows. Other economists (notably John E. Cairnes 1873; Stanley Jevons 1884) took a contrary view. They put forward an explanation of the workings of the international monetary system that was the ﬁrst expression of the monetary approach to the balance of payments problem (Frenkel and Johnson 1976). They considered that, for given levels of international specie needs, the movements of gold and silver were determined by variations in monetary metal output. Simply put, the outﬂows of silver from France were ‘caused’ by the Californian gold ﬁnds. This approach, unlike the theory of exogenous inter-zone trade balances, attributed a key role to the increase in available monetary resources as the reason for metal ﬂows among the different monetary blocs. This chapter reviews the theoretical implications of the different viewpoints so as to examine their validity, underlying suppositions, and consequences. A statistical study of the French economy's sensitivity to changes in the world's gold and silver resources is elaborated and used as a test of the various hypotheses developed here. Speciﬁcally, we seek to determine what part of the import of gold and export of silver of the 1850s and 1860s can be read as stemming from the gold mining outpour.

1. HANGING CONTROVERSIES Michel Chevalier deserves credit for being the ﬁrst economist to have developed the ‘Ricardian’ thesis according to which variations in trade are the exogenous force powering bullion movements. His 1859 book De la Baisse Probable de l’ Or systematized notions that had been ﬂoating in the economic and ﬁnancial press as far back as the mid-1850s. For instance, one correspondent of The Economist wrote in 1856: The importations of tea and silk into this country are determined by the demand and consumption. …. We import more tea because its consumption has rapidly increased, and we import more silk from China, not only because consumption has increased, but because the supplies from other quarters have fallen off. …. The import trade from China seems to have been regulated by our consumption and our demand only, and that consumption has necessitated a mode for payment.315 Viewed like that, two distinct problems of adjustment (what to do with the gold and where to get the silver) conveniently found a single solution. It is almost as though the

315

The Economist (18 October 1856: 1150). Along similar lines, a letter to the editor in the 2 February 1856 issue read:Sir, the simple and direct answer to the question is that it is the most lucrative branch of commerce at the present time, and any speculations upon changes of the currencies of Europe, displacements by gold etc., may almost be deemed superﬂous. … The exports of silk alone (without alluding to tea) from Shanghai has averaged the last three years 15 million dollars per annum; there cannot, therefore, be any great reason for wonder at the efﬂux of silver from Europe to the East.

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ﬁnds in California had been engineered on purpose to release the silver stocks needed to pay for the ﬂood of imports from the East.316 The weak point of this explanation is that it assumes more than it demonstrates that the deﬁcit with the Orient is exogenous. Obviously, the specie ﬂows between Europe and Asia were the reﬂection of their trade. This was simple book balancing. Barring offsetting ﬂows of capital, the trade surplus of the Silver Standard countries has to be equal to annual production of silver plus net exports of silver from the bimetallic countries. This is shown in Fig. 7.1, from which it can be seen that, from 1851 to 1870, the silver intake of India, one of the main Silver Standard countries, was closely correlated with annual silver availability. But correlation is not cause. It could instead be argued that a rising demand for silver currency in Asia powered exports of silk or tea.317 Fig. 7.1.Net silver imports into India and available silver resources (millions of £)

Source: Net silver imports in India from Conférence Monétaire Internationale, 1881, p. 202; Silver coinage in the Mints of Calcutta, Madras, and Bombay from Conférence Monétaire Internationale, 1881, p. 204; available silver from Statistical Annexes: annual silver production minus France's net silver imports.

316

This argument was stated very clearly in the 24 March 1859 issue (p. 338): ‘A great deal of gold has been substituted for silver in several countries of the world, and has enabled the European world to ﬁnd the means of paying for its imports from the East.’

317

This criticism was addressed by a reader to The Economist (18 October 1856: 1150).Starting with the proposition that an excess of exports over imports must be paid for with money, it is then shown that in the case of the trade of the West with the East there is an excess of such a character, corresponding pretty nearly with the drain of silver. This is the same as to say that tea, silk, &c. from the East exceed calico, hardware, &c. from the West by a considerable amount, and that hence is the cause of the drain of silver. … In the same way the drain of silver is accounted for, so also might the drain of tea …. Calicoes, hardware, silver, &c. from the West exceed silk, cotton, &c. from the East during the trade of the last few years by a rapidly increasing amount, and hence the cause of unusual shipments of tea, which are required to make up the balance. But in truth the explanation in either case goes for nothing. It merely tells in ﬁgures what is happening, but does not give the reason. To ﬁnd that, we should look further than the exports and imports tables which, even if perfectly accurate as far as they go, yet merely show the variations and extent of the trade in different articles, not the causes which govern them.The journal replied to this correspondent that it was easy to identify the main cause: if this had been increased demand for silver in Asia, there would have been a glut of Oriental goods on international markets and prices would have fallen.

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The concern to address this weakness lies at the heart of Michel Chevalier's work (Chevalier 1859) in which he outlined a series of ‘exceptional reasons’ which, from 1852 on, might have sparked an increase in demand for silver ‘in the direction of the Levant and the Far East, India, China and the neighbouring regions’.318 Food shortages, silkworm disease, uprisings in the British colonies—what Chevalier called ‘violent shocks’—were to him what we would today call exogenous events. Their incidental or political nature placed them out of the realm of economic events and could, he thought, justify their being seen as ‘primary causes’ for the outﬂow of silver.319 But the years came and went and silver exports continued. Other culprits had to be found. Their list later lengthened in successive editions of Chevalier's Cours d’Economie Politique. In the early 1860s, Chevalier explained the drain on silver by a sudden rise in the demand for tea, and by the blockade of the Confederate ports during the American Civil War, which obliged the cotton trade to turn towards Asia. As the ‘exceptional causes’ piled up, the argument lost force. The export of silver in the 1850s and 1860s was a lasting phenomenon, and mental contortions were needed to explain it by a succession of transitory shocks.320 Lastly and most importantly, the ‘political’ character

318

The commercial relations of Europe and Asia have been … considerably modiﬁed. … The bad harvests have compelled the people of Europe to resort to the East for rice; … the crop of silk having failed in France, Italy, and elsewhere, the silk manufacturers, so numerous in France, Switzerland, England, and Germany, have been obliged to resort for a much larger portion than heretofore of their raw material to China, where it is cultivated in great quantities; and we all know that silk is a very costly article. It is under these inﬂuences that the exportation of silver from the nations of the West into Asia has experienced, since 1852 and 1853, the enormous augmentation mentioned above. It must be borne in mind that the magnitude of the amount of silver absorbed annually by Asia, is of recent date; it is an unforeseen phenomenon which has abruptly presented itself, and one could not conscientiously take it for a fact deﬁnitely and unchangeably established.From the English version of Chevalier's book translated from the French and prefaced by Richard Cobden (1859: 70 –1).

319

1866: 414–15.

320

Alphonse de Rothschild agreed with Chevalier on this point, and went even further, claiming that international trade was the sole cause of bullion movements. At the 1870 Enquiry, he made the following declaration (Enquête sur la Question Monétaire, 1870 [1872]: Vol. I, 101):The greater or lesser abundance of gold and silver depends on the reciprocal trade conducted in the world. … If silver is less plentiful, it is because the countries which use silver money have sent us more goods; if it is more plentiful, we have sent them more. … Gold or silver are asked for depending on whether one trades with a country which prefers using the ﬁrst or the second of these metals. The demand is all the greater when business transactions are brisk. This is a good thing, for a country takes our metal only in exchange for commodities produced by itself.See also B. Gille (1967) who summarizes Alphonse de Rothschild's diagnosis and, in the process, puts the problem analysed in this chapter in a nutshell: ‘The disequilibria between the metals were caused less by ratio modiﬁcations generated by bullion stock variations than by disequilibria in the circulation of commodities. International trade between the gold and the silver zones in a sense regulated bullion movements.’

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of Chevalier's list of events did not prove of itself that silver ﬂows were inevitable. Tea imports could have been paid for by shipments of goods, not silver. The reasons behind imports are not necessarily the reasons for surpluses. We still need to know why the silver zone posted these surpluses.321 In the late 1850s, the theories defended in The Economist and the works of Chevalier came under attack from an American economist, J. E. Cairnes.322 In a series of articles later collected in the chapter ‘Essay Towards a Solution of the Gold Question’,323 of his 1873 book Essays in Political Economy, Cairnes cut the Gordian knot of gold output and silver ﬂows by positing a direct causality between both. His point was that ‘although the metallic drain to the East is composed principally of silver, the efﬂux— at least in its present proportions—is not the less certainly the consequence of the increased production of gold’ (1873: 99). This opinion was later shared by Jevons (1884) who rejected the theory of ‘these excellent authors’ for whom the silver drain resulted from a trade imbalance. He concluded that the true origin was the ‘depreciation of gold’ (i.e. a decline in the commodity value of gold).324

321

The case made by Michel Chevalier, despite its weak points, continues to hold sway especially among historians of the period. An example is the book by C. Fohlen (1956) which displays two graphs to prove that (a) the American Civil War coincided with a shift to Egypt and India in the source of France's cotton imports, and (b) the exports of silver specie from Marseilles occurred at the same period. From this double connection he traces a relation of cause and effect between the needs of the textile industry and the rarefaction of silver currency during the 1860s. Martin (1977) also asserts that ‘Therefore it can be surmised that the special European needs for precious metal in Asia made exchange more expensive and resulted in specie exports, primarily in silver, which eventually caused the rate of exchange to subside.’ Likewise, Plessis (1985b), to explain the silver exports of the 1850s, talks of ‘the needs of the Orient Army during the Crimean War’. Even more recently, Gallarotti (1990) argues that once American cotton came back on the international market (after the American Civil War), Indian exports could never again attain the levels of preceding years, thus lowering the global demand for silver. A ‘sophisticated’ version of Chevalier's thesis can be found in the Hughes–Cottrell analysis (see below). One of Cottrell's points is that, although the Silver Standard European nations posted a surplus in the 1850s, their situation seems to have gone in the opposite direction in the 1860s. Cottrell's contention loses force, however, when we remember that Cairnes’ argument holds only for the silver zone considered as a whole.

322

This economist's contribution deserves more attention than it has received so far. An exception is provided by Michael D. Bordo (1975).

323

‘The Australian Episode’ (1859), ‘The Course of Depreciation ’ (1858), ‘International Results’ (1860), and ‘Summary of the Movement. M. Chevalier's Views’ (1860).

324

Jevons (1884: 63):The large amount of silver thrown by France upon European markets has been disposed of in Eastern markets, thus causing, as I think, that remarkable drain of silver to the East which for eight or ten years back has excited so much surprise in the commercial world. Some excellent writers have attributed this drain to the balance of trade between Europe and India, as disturbed by the transmission of English capital to railway works in India. The drain of precious metals thus accounted for serves to explain the supposed fact that the precious metals have not fallen in value here. It would be extremely difﬁcult, if not impossible, to prove or disprove anything a priori, by the balance of trade between Europe and the East. But having shown upon a wide basis of facts that both gold and silver are depreciated here, I am much more inclined to regard this depreciation as the cause of the Eastern drain. The fall in the value of silver, compared with most other goods, makes it more proﬁtable to pay for Eastern produce with silver bullion than with our manufactures, silver being always acceptable among Asiatic nations.

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The theses of Cairnes and Jevons are not entirely devoid of ambiguities.325 Yet they constitute an embryonic general equilibrium analysis—the primitive form of a monetary theory of international bimetallism. The important notion that gold and silver ﬂows were two facets of the same phenomenon is well illustrated in the following excerpt from Cairnes: But the bulk of [the new gold production] has been received into the currencies of Europe and the United States, from which it has largely displaced the silver formerly circulating; the latter metal, as it has become free, ﬂowing off into Asia, where it is permanently absorbed. Viewing the effect as it occurs in the mass of the two metals combined, it may be said that the stream which rises in the gold regions of Australia and California ﬂows through the currencies of the United States and Europe, and, after saturating the trade of these countries, ﬁnally loses itself in the hoards of China and Hindostan. The tide which comes to light in the sands and rocks of the auriferous regions, disappears in the accumulations of the East. In conjunction, however, with the movement there has been a counter one. With every advance in the metallic tide, a stream of commodities has set in in the opposite direction along the same course,—a stream which, issuing from the ports of Europe, America, and Asia, and depositing as it proceeds a portion of the wealth with which it is charged, ﬁnds its termination in the markets of the gold countries. Here, then, we ﬁnd a vast disturbance in the conditions of national wealth,—a disturbance originating in the gold discoveries, and resulting in a transfer, on an enormous scale, of consumable goods—the means of wellbeing—from one side of the globe to the other.326

2. SOME ANALYTICS It is useful, in order to clarify the intuition of Cairnes and Jevons, to consider the effects of an increase in bullion stocks in a uniﬁed international economy composed of three blocs which have respectively adopted the Gold Standard, the Silver Standard, and a ﬁxed-ratio double standard. Let us suppose that new gold lodes are discovered. What we shall do is describe the properties of the new equilibrium so as to highlight the necessary adjustments. A gold strike increases the world's gold stock. Common sense dictates that an increase in total bullion resources will make possible a higher degree of both the industrial and monetary uses of the bullion. Moreover, for as long as gold and silver circulate in the bimetallic bloc, the gold–silver exchange ratio is constant (it is equal to the legal ratio). Thus, the global money supply will be greater after the discovery than before. Let us now suppose, for the sake of simplicity, that each bloc increases its monetary holdings in proportion to its size in the ‘before’ situation. The gold, silver, and bimetallic blocs will therefore end up with larger specie stocks. In the absence of capital ﬂows, there is only one way to achieve this. The gold bloc and the bimetallic bloc can increase their money supply by importing and coining some of the newly mined gold. The silver bloc, by contrast, must take silver from the bimetallic bloc. If gold is not discovered in silver countries, this can be done only by importing silver in exchange for exported goods.

325

The rate of displacement of silver by gold, in particular, remained fairly unclear, owing to the lack of reliable statistics. Interestingly, Cairnes was not sanguine as to the chances of bimetallism's survival. He surmised (‘M. Chevalier's Views’: 145) that around 1861 France had emptied itself of its silver currency.

326

Cairnes (1873: 79).

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The bimetallic bloc does two things at once: it increases its stocks by importing gold, and supplies the silver needed by the silver bloc, replacing it with gold. Gold inﬂows in the bimetallic countries must more than offset silver outﬂows, the net difference being made up of exported goods. Each step in this equilibrium scenario is consistent with the facts recorded so far. According to this model, the distribution of metal holdings across the different countries depends on national propensities to hold specie, and on the total quantity of bullion available. Commodity ﬂows between Asia and Europe are no more than the endogenous offset to bullion movements. This reasoning is open to two interpretations—which are analytically distinct but not necessarily mutually exclusive. They differ as regards the exact transmission mechanism. The ﬁrst gives precedence to prices and inﬂation differentials. It was given in this form by Sayers (1933). The arrival of gold begins by driving up prices in the gold and bimetallic zones, since these are the only ones where the mine output can be directly transformed into money. The resulting inﬂation is therefore faster in the West than in Asia, and the competitiveness of Oriental products is thereby enhanced. This stimulates demand for imports and ﬁnally shipments of silver. The silver, absorbed by the silver bloc, in turn causes inﬂation which ends up levelling Oriental and Western prices. This reading can be understood as Ricardo's relative price effects version of Hume's famous price-specie ﬂow mechanism (1758). The growth in gold stocks causes an increase in the money supply then, according to a quantitative theory-style of argument, a price differential. By making Asian products relatively cheaper, net exportation of goods from East to West is stimulated, causing a ﬂow of silver in return.327 This interpretation has been subject to criticism (see Cottrell 1992). Hughes (1960), for example, worked out the prices (in pounds) of the tea, indigo, and sugar imported from Asia and showed that they rose faster than the prices of commodities produced in Europe. At ﬁrst sight, this appears to contradict the Ricardian reasoning expounded earlier. If the prices of Asian imports had risen faster than prices in Europe, the inference is that the growth in demand for Oriental goods was not ‘arbitrage demand’ (that is, demand engendered by the lower price of the goods) but resulted rather from shifting preferences (an exogenous reliance on Indian and Chinese imports). Customers buy the Asian products because their equivalent does not exist in Europe or America. When Cottrell looked at comparative trends in European prices and the prices of Oriental imports, he believed he had found a way of testing and rejecting the notion that the Asian surplus was endogenous.328

327

In Sayers’ treatment, we may note that the geographical situation (Europe versus Asia) rather than membership of a monetary zone (gold versus silver) is the determining factor in price movement transmission delays. Sayers presumes that the transmission of inﬂation within Europe (e.g. Great Britain, France, and Germany) would have been rapid, whereas the transmission from Europe to India or China would have taken longer.

328

Cottrell (1992: 224):The mechanism behind the mid-century ‘drain’ of ‘Treasure’ to the East has been the subject of some debate. In the early 1930s Sayers argued that it was caused by Europe's growing import surplus with the Orient which arose from differential rates of inﬂation leading to a relative cheapening of Eastern luxuries on Western markets. … However, Hughes (1960) demonstrated that the (English gold) prices of silk, tea, indigo, and sugar increase more than those of Western produced goods, so that there was a price inelastic demand for such Eastern imports during the 1850s. This approach can also be applied to the mid-1860s when, as a result of the Civil War, there was a price inelastic demand in Western Europe for raw cotton from Egypt and India.

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There is, however, a second way of interpreting the Cairnes and Jevons thesis, probably more in line with their thinking, which disqualiﬁes Cottrell's ‘test’. This interpretation is also consistent with a reading of Hume's analysis that puts less emphasis on relative price effects, and more on wealth effects. The exogenous increase in gold stocks implies a reshaping of consumption patterns. The persons who receive this ‘manna’ will increase their spending, saving, and specie holdings. Part of the newly mined gold is either processed by industry or turned into coin. The latter fraction is then either kept for circulation purposes or exported in exchange for goods. This new demand beneﬁts to all other parts of the world, all blocs included. The long-term distribution will therefore be determined by the initial relative wealth of the different countries and their propensity to keep metal for circulation. Commodity and specie movements are thus the way through which the transfer of wealth (following the discovery of mines in a given place) is achieved. The West (where gold has been discovered) raises its spending vis-à-vis the silver zone. This induces a surplus in the silver zone, and the only way to clear the disequilibrium is to substitute one metal for the other within the bimetallic economy. This line of thinking is not necessarily at odds with Sayers’ argument. Let us suppose that the different economies produce a uniform consumer good and that there is always a price to be paid (e.g. shipping costs) for obtaining supplies from abroad. Discovering gold in a given country tends—via the wealth effect—to increase demand for the consumer good, which makes its relative value rise (or lowers the relative value of gold), up till the point where it becomes proﬁtable to import the good. (This is called arbitrage trade.) Prices rise in the country where the specie resides until they trigger an outﬂow of metal to other countries. This then, through a process of propagation that depends on commodity arbitrage costs (mainly freight charges), generates inﬂation in the different blocs. In this scenario, Asia is affected last, more because it is far away than because it belongs to the silver bloc. In this simpliﬁed situation where only one good is traded, the wealth effect and Hume's mechanism are, so to speak, two sides of the same coin. Now let us suppose that the different countries produce unlike goods which they then trade. In this case, the discovery of gold in a given country, by enriching its people, increases not only domestic demand but also demand for imports. Gold ﬂows out even before prices go up. The variety in consumer goods also means that the price rises will not necessarily be the same across countries. Comparison of inﬂation rates will not then produce any conclusion as to the exogenous nature of the silver zone's surplus. The latter results, not from arbitrage among sales prices in the different blocs, but from the enrichment of the gold zone.329 The enrichment creates a transfer of demand towards

329

If we refer back to our analysis in Chapter 3, trade arbitrage can be said to correspond to shipments at the margin, while wealth effects are associated with intra-marginal transactions.

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the silver zone, whose prices then rise, although not necessarily in the same proportion as prices in the gold zone (all depending on such factors as elasticity). There will still be a correlation of inﬂation rates without necessarily a complete convergence of prices.330 Whatever interpretation of the Cairnes–Jevons thesis we opt for, a measure of uniformity in price changes across monetary zones should be expected, and more importantly, the silver ﬂow to Asia is explained as a corollary of the gold discoveries. Figure 7.2 and Table 7.1 provide evidence on the ﬁrst count, which is discussed in greater detail in Box 7.1. As can be seen in Fig. 7.2, there was more than a superﬁcial similarity in the inﬂation rates of the various zones. Bimetallism, by putting the whole world on an essentially equal footing, ensured that any inﬂation resulting from bullion discoveries would be a worldwide phenomenon. What still remains to be done is to show what proportion of the bullion ﬂows in and out of France can be traced to the gold ﬁnds. That this share is large will be taken as conclusive evidence in favour of the views of Cairnes and Jevons. Fig. 7.2.Wholesale price indexes in France, England, Germany, and ‘Asia’

Source: UK, France, Germany: Mitchell (1980); Asia: Soetbeer (1889: 88–90). 1860: 100. Table 7.1. Simple correlation of inﬂation rates in the three blocs United Kingdom France Germany Asia

United Kingdom 1 0.6 0.67 0.84

France

Germany

Asia

1 0.77 0.63

1 0.44

1

Source: Calculated from Soetbeer (1889), and Mitchell (1980).

330

Obviously, the disparity among commodities makes it impossible to apply strict versions of the single price law. Price convergence can be no more than partial.

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Box 7.1. Purchasing power parities and inter-bloc price correlation The purchasing power parities hypothesis posits that, if international markets are sufﬁciently integrated by commodity price arbitrage, price levels can be expected to even out across regions (taking exchange rates into account, as necessary). If the hypothesis is true, it should be possible to observe a close correlation among price indices in the different blocs over the period 1848–70. Two points may be made in this regard. First, available data reveal a strong correlation among the inﬂation rates of the regions under study. Second, the ‘inter-bloc’ correlation (between two countries belonging to different blocs) is at least as strong as the ‘intra-bloc’ one (between two countries in the same bloc). The inference from the second point is the following: In a simpliﬁed model where price differences within a given bloc are disregarded (since the economies have been aggregated on the basis of their metallic standard), there is no reason to take account of price differences between two separate blocs. This argument may be seen as a variant of the Genberg–Zecher criterion (McCloskey and Zecher 1976), whereby empirical variations from the purchasing power parity hypothesis are evaluated by comparing them with the deviations noted within a national economy conventionally qualiﬁed as ‘integrated’. The following countries have been chosen as examples: France, representing the bimetallic bloc, Great Britain, for the gold bloc, Germany, for the silver bloc, and—owing to its role as drainer of silver—‘Asia’. As regards the ﬁrst three countries, we have used the wholesale price indices quoted by Mitchell (1980). For Asian countries no satisfactory series for the whole period appear to exist. We therefore used Soetbeer's (1889) ‘index number’, derived from a ‘basket’ of nineteen colonial products whose prices (also wholesale) were recorded by the Hamburg ofﬁce of trade statistics. The series covers the period following 1851. The similarity among the price curves is striking. It is corroborated by a calculation of the simple correlation coefﬁcients among the regional inﬂation rates set out in Table 7.1. They are at least as high as the ones calculated for the period 1880–1913. McCloskey and Zecher (1976, 1984) give a coefﬁcient of 0.66 between England and the United States, 0.40 between Germany and the United States, and 0.45 between Germany and England. For our period, the strongest correlations occur among regions not belonging to the same bloc (0.77 between France and Germany, and 0.84 between the United Kingdom and ‘Asia’). The last ﬁgure tallies with the observations of Newmarch and Tooke, who found that from 1851 to 1855 the value of the goods sent to India from England rose at the same rate as the value of the goods imported from India by England. At the other end of the scale, the weakest (but still substantial) correlation was the one obtaining (0.44) between ‘Asia’ and Germany, which nevertheless shared the same standard. The purchasing power parity hypothesis, insofar as it held good inside each bloc, held good also for the world as a whole.

3. MONETARY THEORY OF INTERNATIONAL BIMETALLISM In this section, we test the explanatory validity of Cairnes’ and Jevons’ analysis using a simple model for describing general equilibrium on the international economy. One property of the model is that it generates a specie ﬂow to the silver zone whenever gold is

168

A MONETARY THEORY

discovered in the gold zone. The structure of the model proceeds from the notions set out in Chapter 1. It will be shown to follow the monetary approach of the balance of payments which stresses the international dimension of monetary equilibrium. It is thus consistent with the intuitions of those nineteenth-century writers who argued that the Silver Drain was a consequence of the Gold Rush. The model shares a number of concerns with the studies by Laughlin (1895), Hutter (1938a), Drake (1985), and Friedman (1990b). These authors tried to assess the monetary consequences of the changes that occurred in silver minting after 1870.331 The model we build and estimate here will become a considerable asset when, in the next chapter, we move on to discussing whether bimetallism could have survived. Our analysis focuses on the reaction of the French economy's gold and silver holdings to changes in international bullion resources. For the sake of tractability, we shall take a much-simpliﬁed view of the issues discussed in the previous section. Let us postulate a world economy divided into three monetary blocs (gold, silver, and bimetallic). Within a given period, each bloc produces a given quantity of a single consumer good which is tradable and perishable (we shall ignore time indices for simplicity). Gold and silver are durables available in given quantities G and S. International arbitrages ensure uniformity in the price of gold, silver, and the consumer good around the world. Since there are both gold and silver monies in bimetallic circulation, the gold–silver price ratio equals p_ g, which is the legal ratio in the bimetallic bloc (15.5). The distribution of money stocks across the different countries depends on national propensities to hold specie and on

331

These studies have often run up against the problem of data scarcity, making the calculation of a general equilibrium model difﬁcult. As Friedman (1990b) writes,I am left in a quandary; I am unhappy with what I have done, but even more unhappy with the most obvious alternative, a simpliﬁed general equilibrium analysis. A comprehensive general equilibrium analysis would have to include … the determinants of the fraction of gold and silver production that go into monetary and non-monetary uses. Construction of such an expanded general equilibrium model would be extremely laborious, and would deserve little conﬁdence.In our study, this problem can be surmounted thanks to two advances. On the theoretical front, the use of ‘pseudo-monetary demand’ functions, which rely on the notion that monetary uses and industrial uses remain proportional to real income, produces a drastic simpliﬁcation. On the empirical front, the availability of a series for France's monetary holdings (Chapter 4) is obviously decisive.

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incomes in the gold bloc (i = g), the silver bloc (i = s), and the double standard bloc (i = b):

where Yi is the real national income (quantity of the consumer good available) of bloc i, p is the world price level, pg is the international price of gold, ki is the Cambridge coefﬁcient,332 and and are the demand for gold and silver holdings respectively in country i (the price of silver is set equal to 1). Similarly, non-monetary demand for gold and silver is given (

and

are constants) as:

So as to preserve tractability, the different blocs are deemed to be on ‘balanced’ growth paths; in that way, the real incomes of the different countries remain proportionate to one another:

To make the model easier to handle and read, we lump monetary demand for silver in the silver bloc together with non-monetary demand for silver in the three blocs. This gives us a silver bloc pseudo-monetary demand (Sn) which depends only on p, Yb, and a set of exogenous parameters represented by μs. Doing the same with gold, we obtain the gold bloc pseudo-monetary demand (Gn). Lastly, forgetting the bimetallic bloc's indices (kb = k and Yb = Y) and calling its gold money Gm (silver money Sm), we arrive (G and S being the total available quantities of gold and silver available at a given moment) at:

This set of equations resolves without difﬁculty.333 From them we obtain a reduced system describing the French economy's gold and silver monetary holdings as a function of world stocks of the two metals.334 The system sums up formally into two equilibrium relations:

332

See Chapter 1.

333

Ibid.

334

Being a reduced system, the formula allows us to dispel the problem of separate identiﬁcation of metal demand functions for monetary and non-monetary uses.

170

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in which:

The parameters mg and ms result from the combination of the different propensities to hold bullion (as coin or commodity) in the various parts of the world. They represent the equilibrium effect on French holdings of a marginal rise in world gold or silver stocks. If, for example, gold resources increase by one unit, gold holdings in France increase by (1−mg) whereas silver holdings decrease by ms units, which are absorbed by the silver bloc. Thus the effect of a rise in gold production is consequently not, in general, a one-for-one substitution between the two monetary metals in the bimetallic countries, since it is necessary to more than offset the outﬂow of silver.335 The exact rate of substitution depends on the underlying parameters. It depends in particular on the relative size of the demand for money in the bimetallic bloc. If this demand is very large, mg and ms are close to zero. Any new unit of gold is absorbed into the bimetallic country's stocks without causing the ejection of the other metal. The might of the bimetallic bloc is such that it attracts new production of a precious metal without generating any appreciable adjustment on the market for the other metal: we call it the ‘black hole’ effect. On the other hand, if the tendency in the bimetallic bloc to hold on to specie is weak, each unit of gold entering it will chase out a unit of silver. This is bimetallic arbitrage in its purest form. Interestingly, ‘pure’ bimetallic arbitrage coincides with situations in which the double standard has in fact trouble surviving. In this case, the bimetallic economy is so ‘tiny’ that bimetallism is threatened by minor changes in gold or silver output. The model's solution also provides a natural way to determine the boundaries within which the outstanding resources of gold and silver must stay in order to remain compatible with an equilibrium exchange ratio equal to the legal ratio. These boundaries, which we discussed in Chapter 1, can be straightforwardly obtained by imposing positive gold and silver stocks as a constraint in Equation (7.5a). In our model, it is a necessary and sufﬁcient condition for a regime of effective bimetallism to exist that Gm > 0 andSm > 0:

The lower boundary indicates the level at which the bimetallic economy becomes a de facto Silver Standard one; the upper boundary the level at which it becomes a de facto Gold Standard one. The interval between is thus the double standard's ‘survival range’. It is easy to see that the width of this band tends towards inﬁnity when k does the same (the size of the bimetallic economy becomes huge compared with the rest of the world), and towards zero when k tends towards zero (the size of the bimetallic economy becomes minute compared with the rest of the world). The logical conclusion is that the gold-for-silver substitution mechanism and, by the same token, the operation of bimetallism depend directly on the size of the bimetallic money supply. There is an explicit relation between the amount of bullion held around the world, the amount held in the bimetallic bloc, and the functioning of the double standard.

335

Noting that 1 − mg − ms > 0, we get: 1 − mg > ms .

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Equation (7.5a) provides a simple linear speciﬁcation of the relation between the quantities of gold and silver held in France and the world's bullion stocks. It is then possible, by estimating this system on the basis of empirical data, to retrieve estimates of parameters mg and ms and so obtain an assessment of bimetallism's sensitivity to bullion supply shocks. All that is needed for this is to interpret Equation (7.5a) as long-term equilibrium relations among nonstationary variables. The non-stationarity here is intrinsic, since the right-hand variables are bullion stocks, that is, the sum of a series of random annual ﬂows. From an econometric viewpoint, (1, 1-mg,-mg) and (1, -ms,1-ms) can therefore be considered as the ‘cointegration’ vectors of each relation. The annual series for France's gold and silver holdings for the period 1840–78 is known (it was constructed in Chapter 4). Also known are the annual world ﬂows of bullion production as from 1850 (see Appendix I). The world's stock of gold and silver at the end of 1849, for which no reliable estimates exist, can fortunately be retrieved from the estimation of the model. Calling ΔG(t) (respectively ΔS(t)) the variation in the world gold (respectively silver) stock from 1849 to date t, Equation (7.5a) may be rewritten as:

with

where G(1849) and S(1849) are the world stocks of gold and silver in 1849. Table 7.2 reports regression output. Each equation was worked out separately.336 Results suggest similar valuations for mg and ms (0.374 and 0.387 respectively), pointing to a symmetrical behaviour by the double standard. The initial stocks of gold and silver were computed in a second stage as solutions to Equation (7.7b). The stocks of gold and silver in the early days of the Gold Rush work out respectively at 5,521 and 7,611 million francs. The R2 amounts to 0.97 for the ﬁrst equation and 0.92 for the second. The important conclusion is that the regression accounts for all but a small fraction of the variance in France's specie holdings. Table 7.2. Estimation of system 7.7a 1st equation 2nd equation

mg or ms (T-stat) mg = 0.374 (29.04) ms = 0.387 (55.5)

Constant (T-stat) A = 603 (4.3) B = 2528 (33.3)

R2 0.97 0.92

Source:Author's calculations.

4. THE BALANCE SHEET OF BIMETALLISM The regression output allows us to compare the observed and predicted evolution of gold and silver holdings in France (Fig. 7.3). The close similarity between the two curves

336

It is possible in this way to obtain convergent estimators from the parameters of the model. Owing to the constraint on the parameters, the estimators have been calculated from maximum likelihood (see, for example, Hendry 1986). The procedure used can be regarded as the ﬁrst step in Engle and Granger's method for analysing error correction models and consists in identifying the long-term relation between cointegrated variables (cointegration vector). As Hendry points out, if the R2 is sufﬁciently high and the Durbin–Watson statistic is not too low, the procedure is robust, even for limited samples. (We are working with annual data over a period of 20 years.)

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suggests that the functioning of international bimetallism over the period 1850 –70 is satisfactorily described by the model. The ﬂow of gold into France and the outﬂow of silver were indeed adjustments required for the achievement of a monetary equilibrium largely governed by variations in gold and silver production. Slight cyclical variations notwithstanding,337 the evolution of France's monetary holdings can be explained as a response to the exogenous mutations undergone by international bullion stocks. This is a very important result. It shows that most of the export of silver from France can be interpreted as resulting from the Gold Rush, in line with the views of Cairnes and Jevons. While this does not preclude the existence of some ‘autonomous’ contribution by Eastern trade, it shows that the amount taken by ‘Asia’ was precisely the amount which the Gold Rush drove out of the French economy. The idea that the Silver Drain was merely a consequence of the Gold Rush is therefore substantiated. Fig. 7.3.Gold and silver stocks in France: Observed and predicted patterns

Source: Author's calculations. The second advantage of the foregoing exercise is that it enables us to measure the French economy's sensitivity to movements in bullion production. Since the rise (in volume) of gold and silver stocks had symmetrical effects on the respective holdings of the two metals in France, we need to only discuss the impact of a marginal one-franc rise in the world gold stock. This would set off a 0.6-franc rise in France's monetary holdings, the rest (0.4 franc) being absorbed by industry or the circulation of the gold bloc. On the other side, the rise would expel about 0.4 franc in silver from France's holdings, in the direction of the silver bloc or for use by industry. The marginal substitution rate is about two for three, and the net increase in the French money supply is 20% of the new gold discovered only. From that, it may more easily be understood why the effects of the Californian ﬁnds on the international monetary system remained fairly limited. Through the action of bimetallism, the rise in gold production was buffered; it was to be compared not with the stock of monetary gold only but with the entire sum of gold and silver circulating as money in the world. Now for a run-down of the macroeconomic adjustments. France, without additional production of silver and 12 billion francs of gold mined from 1850 to 1870, would need

337

These can have a number of causes: (a) auto correlation of errors committed when estimating ﬂows of production are magniﬁed in the stocks series; (b) adjustment can entail costs and so delay reaction; (c) ﬂuctuations in real income around long-term income (wealth or permanent income) can induce ﬂuctuations in money demand.

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173

to have held about (0.4 × 12 =) 4.8 billion francs in monetary silver so as to be able to absorb (0.6 × 12 =) 7.2 billion francs in gold. But over the same period, 5 billion francs of silver were mined, associated with a virtual inﬂow of (0.6 × 5 =) 3 billion francs in silver and a virtual outﬂow of (0.4 × 5 =) 2 billion francs in gold specie. The net effects of bullion production were a loss of silver of roughly 1.8 billion and a gain in gold of about 5.2 billion. In hindsight, the overall substitution was one for three. The marginal substitution effects, fairly large, of the rise in gold production were, at the macroeconomic level, limited by the structural effects. The partial equilibrium theorists and other supporters of the ‘knife edge’ view who, focusing exclusively on gold production, prophesied the imminent demise of the double standard, were naturally and invariably contradicted by the facts. The continued and sustained production of silver, even if it was not large enough to reverse the trend of gold-for-silver substitution, nonetheless partially offset its ejection from the French economy. There lies the lost secret of bimetallism's stability.

5. CONCLUSION Both theoretically and empirically, the main lesson to be drawn from this chapter is that international bimetallism was a remarkably supple system. France's propensity to hang on to specie, strong by national standards, but not overwhelming in relation to the rest of the world's holdings (in 1848, France's specie stock accounted for about 23 per cent

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of world bullion assets, all uses combined), was enough to resorb the bullion stock structure upheavals that occurred after 1848. Second, the fact that a simple general equilibrium model is able to integrate the development of France's precious metal holdings and world bullion production within the same general framework goes to show how rapidly France's gold and silver circulation adjusted to shifts in global bullion resources. Thanks to this rapidity, the French monetary system avoided coming under excessive pressure. International bimetallism can therefore be considered as having functioned smoothly. Lastly, the statistics examined should have cast new light on the meaning to be assigned to international bullion ﬂows in the nineteenth century and the way the metallic systems worked. Whereas a still widespread approach among economists is to interpret and model net specie inﬂows as primarily exogenous factors—imposing from the outside, in Keynesian fashion, monetary gluts and shortages with which the economy must then cope (see, for example, LévyLeboyer and Bourguignon 1985)—the theory outlined here suggests a totally different angle of vision for regarding bullion movements. As argued, given the currency needs of the different blocs and the demands of industry, the great bullion ﬂows that occurred in the 1850s and 1860s, matching the interaction of variations in gold and silver production, constituted the endogenous resolution, on a world scale, of the international bimetallic equilibrium. That is why it is a profound mistake to regard the balance of payments as an almost physical arena where ‘shocks’ occurred that required monetary adjustments. Under the monetary regime of the mid-nineteenth century, global bullion ﬂows truly reﬂected the unending process of preservation of equilibrium—a process which unfolded on a world market powered by the confrontation of money demands and bullion resources, and set in motion by arbitrage.

8 The French Crime of 1873: An Essay in Interpretation If on the other hand the French Government decide—which all our information shows to be most likely—that their currency shall continue to be regulated by the same Law as at present, and that gold shall represent the same value as was ﬁxed by the Law of 1803 … then, even supposing that gold continues to be produced in much larger proportions than has hitherto been the case in relation to silver, the change in their relative value will be very slow for a very long time to come. The Economist (1851: IX 384, 1) The experience of 1850 gave proof [of the double standard's stability]. Bimetallism could be maintained even though the index of gold production rose by 44 points … In 1873, the bimetallic area was still, it seems, large enough to have buffered and absorbed in the same way a smaller inﬂux of silver. The index of silver production rose by only 22 points from 1870 to 1880 … If all the bimetallic countries had been able to agree together or if, at least, the machinery of bimetallism had been allowed to operate freely, it would probably have been possible to preserve a ﬁxed ratio between gold and silver … Neither gold nor silver was by itself adequate to meet the monetary needs of the day; the total demonetization of one or the other was impossible. Allowed the time, the bimetallic system would have recovered its international equilibrium as bullion movements ceased and the gold–silver ratio restabilized. Jacques Mertens (1944: 333) Could bimetallism have survived over the very long term? Probably not. At root, the ratio's stability and the arbitrage process depended entirely on the size of the metallic base upon which the system rested. But this base was doomed to shrink as new monetary substitutes made headway and reduced the need for specie. As Knut Wicksell ﬁrst pointed out, the amount of specie in use in the industrialized countries dwindled throughout the nineteenth century, ﬁrst in relative, then in absolute terms. If we extrapolate that trend long enough, we can imagine that at some point the industrial applications of gold and silver would have outweighed their monetary use and eventually made world stocks of gold and silver incompatible with a stable 15.5 ratio. Since bimetallism rested on private arbitrage, it required that a large proportion of the specie supply should be in the public's hands. The quasi-nationalization of specie, which tended to drift into central bank reserves during that period, was bound to erode the working basis of bimetallism.

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These conjectures are not, however, of immense interest when it comes to understanding the actual reasons for the bimetallic system's demise. All currency systems are more or less transient. Even the Gold Standard, which triumphed over bimetallism in the 1870s, is now long dead and buried. Since international monetary systems are the more or less orderly response to a set of international conditions prevailing at a given point in time, they are replaced as and when the economic conditions responsible for their existence themselves change. But beyond these generalities, the exact motives, which impelled France to eliminate the double standard in the 1870s, are not known. This move was not isolated. It coincided with decisions to curtail the monetary role of silver in Germany, the United States, Holland, the Nordic countries, and other places. Yet given France's pivotal role in the operation of bimetallism, the signiﬁcance of French policies is paramount. It having been demonstrated in the seven preceding chapters how France successfully stabilized the gold–silver ratio for three-quarters of a century by acting as an intermediary between the gold and silver segments of the world economy, it seems appropriate to use the knowledge accumulated along the way to decipher the transformation in international monetary relations which occurred in the 1870s. For it was at the end of this process that the Gold Standard ﬁnally emerged. This chapter may therefore be read as a reassessment of the advent of the International Gold Standard. Interpreting the disappearance of the double standard presents a double challenge. On the one hand, there is a need to elucidate the reasons why the French government took a number of temporary measures towards the end of 1873, which severely interfered with the mechanics of bimetallism. On the other, we need to understand why these temporary measures became ﬁnal, putting an end to a monetary organization that had lasted for 70 years. It is the latter aspect, which conventional interpretations of the events of the 1870s, reviewed below, generally miss.338 Our account stresses the chronological interaction between events and political decisions, and the inﬂuence of these on the functioning of bimetallism. The root interaction was that between network externalities and switching costs. During the 1860s, growing trade led commercial interests (especially in Europe) to be attracted by the advantages of having a common standard. Given the predominance of gold or partly gold-based nations in world trade, a Gold Standard was the natural choice. On the other hand, the practical implementation of such a reform implied discarding silver. This involved considerable difﬁculties, especially for Silver Standard nations such as Germany. These countries had to ﬁnd the means to purchase gold, and they had to be able to get rid of demonetized silver on the best possible terms. Until the late 1860s, these difﬁculties deterred countries to actually move to gold and thus stabilized national incentives on the status quo. However, after 1870, the Franco-Prussian war gave Germany the gold resources to carry on its adoption of the Gold Standard. Germany planned to get rid of its demonetized silver through the agency of France's bimetallic system, basically exploiting the mechanics

338

A notable exception, of course, is Merten's book (1944) which raised serendipity to the status of universal law.

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of the international monetary regime of the past decades. The French retaliated in suspending silver coinage while at the same time seeking to protect bimetallism as a domestic regime. This set into motion a number of market reactions which in turn called for public intervention and locked the international monetary system on a new regime where the monetary role of silver declined. Our point is that the end of bimetallism as an international system was in part the result of coordination failure, and in part the involuntary outcome of the successive actions of authorities and markets. This mighty change did not give conscious birth to the Gold Standard as a system; rather, through the adoption of certain practices dictated by the needs of the moment, it fashioned the institutions of a de facto Gold Standard—far different from the ideal classical Gold Standard imagined in the 1930s but which never existed in reality.

1. THE END OF BIMETALLISM: ONE BODY AND FOUR SUSPECTS It is difﬁcult to say that bimetallism was abandoned on any one particular date since the event involved, as we shall see, a chain of drawn-out decisions involving several stages. Yet a date we need, and the logic of arbitrage, which has been our guide in this book, helps identify the key turning point. The abolition of ‘classic’ bimetallism—by which we mean freedom to mint and legal currency status for both metals—must have begun with the fettering of arbitrage operations. On 6 September 1873, the French government decided to restrict the minting of silver to 280,000 francs a day (all workshops combined). On 19 November, the limit was lowered to 150,000 francs. In January 1874, France came to an agreement with its bimetallic Latin Union satellites (Belgium, Switzerland, Italy) to set annual quotas for the coining of silver. The rationing measures created a bottleneck in écu making, which greatly prolonged Mint Voucher maturity dates.339 They soon exceeded 1 year, considerably raising arbitrage costs: a roughly 5 per cent interest loss (the interest rate of the time) had now to be reckoned with. The narrow bimetallic street had become a boulevard. Unleashed, the price of silver thus started falling. In January 1875 and 1876, the Latin Union quotas were renewed practically unchanged and the price of silver continued its downward spiral.340 Finally France, with the Act of 5 August 1876, suspended the minting of silver. The law, initially announced as no more than a temporary measure (the government reserving the right to resume silver minting at a later date), became permanent. It was extended to the whole Latin Union in 1878. The écus in circulation were still legal tender but it was no longer possible to mint new ones. As a result their face value no longer corresponded with their intrinsic value; thus began what contemporaries called ‘limping bimetallism’. That is, a system where bimetallic arbitrage are

339

The limitation on daily minting was indeed the reason for the longer maturities; the reason was not the government's decision to lengthen minting lags, as Lévy-Leboyer (1977b) erroneously claims.

340

Total écu issues for the four countries were set at 120 million in 1874, 150 million in 1875, and 120 million again in 1876. On this episode and the reasons which induced the Latin Union to limit silver minting, see Flandreau (1989, 1993, 1995a).

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

no longer feasible and where only gold can be coined—even if silver coins are received in payment. In effect, such a system is a Gold Standard. With France no longer at the centre of the system, bimetallism collapsed and efforts to reintroduce it failed: France's retreat from the international monetary scene had changed the international monetary system. Today's literature, like that of the late nineteenth century, is full of arguments intended to explain the collapse of the double standard.341 Four main explanations may be identiﬁed. A ﬁrst set focuses on ‘fundamentals’, and questions the economic sustainability of bimetallism. The story here is that the stability of the gold–silver ratio could not have survived the ‘massive’ increase in silver production that began in the late 1860s. This is the fundamentals theory of the end of bimetallism.342 In a related vein, a second type of argument asserts that the commercial ratio's stability could not weather the consequences of War Indemnity and Germany's switch to the Gold Standard. The ensuing sales of silver and purchases of gold by German authorities necessarily resulted in a gold-for-silver substitution in bimetallic currency circulation. If the shock had been too violent—that is, if France's gold stock had been too small—France would have been forcibly hustled on to a de facto Silver Standard by Germany. France, to avoid that, took the preventive step of restricting the minting of silver. This is the strategic unsustainability theory, which emphasizes the monetary consequences of Bismarck.343 Another family of arguments focuses on the costs and beneﬁts of alternative monetary regimes: gold, silver, and double standard. This transactions costs theory suggests that gold was a more economical metal and that it was only natural that it should oust silver. The internationalization of the monetary system and the consequent need for greater efﬁciency required the adoption of a universal, less cumbersome, and more rational standard; so it was that gold chased out silver.344 Finally, a more politically minded version of this theory seeks to identify the pressure groups, which upheld each system so as to interpret the emergence of the Gold Standard in terms of political economy. In this view, the Gold Standard was one expression of the

341

See, for example, the account by Kindleberger (1993, ‘Bimetallism and the Emergence of the Gold Standard’).

342

The ‘fundamentals theory’ is sometimes coupled with a second argument that runs through the literature. This argument is ﬁrst found in Parieu's statements at the Latin Union Monetary Conference in 1874 (Minutes), and is attested by the remarks by Léon Say (‘Projet de Loi Relatif au Droit de Limiter ou de Suspendre la Fabrication des Pièces de 5 Francs en Argent’ in Say, 1892). It may also be found in Soetbeer (1889), and reappears in Gallarotti (1995). This complementary argument invokes the fall in imports from Asia in the late 1860s and early 1870s as an aggravating factor. The decline in the Asian surplus reduced demand for the silver used to clear the trade balance and so helped to ﬂood the markets with an oversupply of that metal. The argument obviously rests on an unsound premise. The previous chapter showed that the silver ﬂows towards India and elsewhere were the endogenous consequence of increased gold production, not an independent factor. Likewise, the slowdown in imports from Asia resulted from a relative fall-off in gold production. Adding it as a separate factor would be double counting.

343

See Kenwood and Lougheed (1971), and Gallarotti (1990, 1995).

344

See, in particular, Redish (1990, 1995, 2000).

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supremacy of the liberal bourgeois class, and its triumph, the triumph of the political order it had promoted throughout the nineteenth century.345 The double standard is considered then to have died from not just one, but from four good reasons. That is perhaps three too many. A postmortem on the corpse may tell us whether one of these was more fatal than the others. As we will see, in effect, none of the blows seem to have been lethal.

The fundamentals theory This is probably the most widely held view. Its contention is that the rise in the production of silver killed the double standard. Gold fever had led the goldseekers to work up the banks of the Sacramento River as far as the Sierras and past Lake Bonpland (today Lake Tahoe), where they hit upon huge deposits of silver: the Comstock Lode found in the late 1850s seemed limitless. Going from ‘bonanza’ to ‘big bonanza’, it looked as though it would repeat for silver the shock produced by the Californian placers for gold, especially since the Nevada-ﬁnds came in addition to increased output from the Mexican mines in Sonora. Mexico and the Silver State stole the show from the Golden State and Australia.346 The world was now faced with a ﬂood of silver, which began to materialize in the late 1860s. The French economy would again have to stabilize the commercial ratio, this time by selling its napoléons and minting écus. But did it have enough gold?347 The ‘15.5’ would be untenable with regard to world bullion resources, and bimetallism would perish on account of its inability to cope with changing bullion supply. France's gold stocks would not be able to withstand the shock imparted to the world silver supply. France, faced with the threat of toppling into silver monometallism, took preventive measures and placed limits on the minting of silver. There are a number of facts, however, which throw doubt on this scenario. Unlike the 1848 metallic revolution, the rise in silver production in North America was gradual, not sudden. Until the late 1870s, the value of silver-mine output remained lower than that of the world's gold mines and did not overtake it until 1880 or thereabout.348 How could this small tremor have so easily caused the collapse of a system that had stood up to the incredible explosion of gold production almost 20 years before, as the opening quote by Mertens suggests? Moreover, the prevailing opinion in informed circles was—in the

345

See Baas (1984), Gallarotti (1990), Milward (1996).

346

Geneviève Gille (1965) and Shirley J. Black (1978) contend that one of the reasons for the French expedition in Mexico was to remedy the rarefaction of silver. Several sources relate that, in the Empress's entourage, the conquest of Sonora was touted as the solution to the shortage of small-denomination coins. This was most probably an opportunistic justiﬁcation for a highly controversial expedition. In any case, the argument rested on ﬂawed economics. There had been absolutely no need to establish an empire on the United States West coast in order to acquire California's gold, just as Maximilian's execution did not prevent Mexican silver from eventually reaching the French market.

347

Kindleberger (1993) argues that the discovery of the Nevada mines was an ‘anti-silver ploy’. In a letter to the author, he traces the origin of this view to the lectures of H. P. Willis on the subject.

348

Figure 8.1 compares the evolution of silver gold output, with and without silver depreciation.

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Fig. 8.1.Annual production of gold and silver 1849–85 (FF millions)

Source: Hay (1886) and author's computations. mid-1870s, that is, when the ﬁrst ofﬁcial ﬁgures on gold and silver production were becoming available—that the trend in bullion resources could not be blamed for the abandonment of the double standard. The 1876 British Commission on the reasons for silver's depreciation concluded indeed:349 Calculations have also been made to determine in what relative proportions gold and silver were produced at different periods, and Your Commission's attention was drawn to the fact that, calculating generously, the production of silver compared with gold was three to one during the early part of the century; that the proportion fell to 0.86 to one in 1848, 0.27 to one from 1852 to 1856; and that, from 1857 to 1875, it rose gradually to 0.68 to one. It may be seen from these calculations that, despite the recent increase in silver production, the proportion with respect to gold is still much lower than it was in 1848, to say nothing of the time when it was three to one. The result of this examination would seem to be that the fall in the price of silver is not due to an excess of productionwith regard to gold. (our italics) This presumption can be veriﬁed empirically. The model constructed in the previous chapter enabled us to assess the sensitivity of French holdings to trends in international bullion resources and then determine the structural limits within which these would

349

Report by the special commission set up in England to investigate the reasons for silver's depreciation, p. 5 (from its French translation in Malou 1880).

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have to remain to be compatible with the legal ratio's stability.350 By comparing these boundaries with the known evolution in bullion resources, we can test the fundamentals theory, which posits that the relation of gold stocks to silver stocks was bound to crossover the boundaries of effective bimetallism.351 The intuition is straightforward. As long as effective bimetallism prevails in France, the share of gold and silver in France's circulation was determined endogenously by changes in world gold and silver stocks. Turning the calculation round, it is possible to deﬁne the band within which these stocks must lie in order for France to retain positive amounts of gold and silver coin.352 In this way, we can tell whether the increase in silver production was such as to eliminate France's gold entirely and, once the last 20-franc coin had been taken away from the circulation, to cause silver to depreciate. This exercise is pictured in Fig. 8.2, which shows the relative evolution of relative bullion stocks against the boundaries of effective bimetallism.353 The graph shows that before 1850, silver made up (in value) the bulk of the world's, and France's, bullion stock. Increased gold production altered the proportions. Around 1855, both metals shared equally in world resources and the French economy. Until the late 1860s, the proportion of gold continued to grow, albeit more and more slowly. After 1870, the modest rise in silver production reversed this trend, but not enough to make it cross the lower bound and force France on to a de facto Silver Standard. Better yet, gold would have continued to be the major component of the French circulation, since the ratio of relative bullion resources would have stayed closer to the upper than the lower bound. Bimetallism could thus easily have weathered the Comstock Lode and the Mexican mines.

The strategic unsustainability theory This second thesis in a sense ﬁlls in the holes of the obviously inadequate fundamentals theory. It takes into account, not only the effect of the increase in silver production, but also the impact of changes in Europe's monetary geography. German currency reform, decided upon in 1871 and launched in 1873, was one of the great economic milestones of the 1870s. German States abandoned their varied (Silver) Standards and a uniﬁed Germany went over to the Gold Standard. The War Indemnity imposed on France by Bismarck was to be paid for by drafts on England, Belgium, Holland, or

350

Irving Fisher had already stressed the importance of such a model for gauging the double standard's odds of survival. He noted, however, in regard to the empirical assessment of bimetallism's structural limits, ‘The statistical determination of these limits is a problem of enormous difﬁculty’ (Fisher 1894: 534).

351

That is, evaluated at 15.1 to 1.

352

See Equation (7.6) in the previous chapter. The lower bound (point of transition to the Silver Standard) is equal to mg /(1 − mg ). The upper bound (point of transition to the Gold Standard) is equal to (1 − ms )/ms .

353

There is an implicit relation between the position of the relative gold and silver stocks in the world and the proportion of each metal in bimetallic circulation. The median line (point where the value of gold circulating in the bimetallic country equals that of the silver in circulation) is given by Log (1 — ms + mg /1 + ms − mg ). Given the estimated ms and mg parameters (which approximately equal each other) this roughly equals 0: gold predominates above 0, while silver predominates below it.

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Fig. 8.2.Could bimetallism have survived?

Source: Author's calculations. Germany. This would enable the Reich to procure the necessary gold. Meanwhile, German monetary authorities were to dispose of the obsolete thalers on the international market.354 These operations, by which silver was put on to the market and gold withdrawn, would naturally result in a gold–silver substitution in France's circulation. The question was whether France would have enough gold to cope with the change in Germany's monetary system. The substitution effect was fully understood. One prominent German economist, Prince-Smith, while speaking before the Berlin Economists’ Society in 1868, told his audience that a change of standard in Germany would inevitably affect France's circulation and thus possibly its policies: ‘France will be on its guard.{Not in Ref. list} It has already signiﬁed … its intention to do away with its silver price tax [i.e. the legal ratio], and will probably do so as soon as we show signs of no longer keeping our silver and throwing it on the market.’355 Similarly, Carlhian, a member of the Paris Chamber of Commerce, declared in 1870 that, if a general trend towards adopting the Gold Standard became

354

See Mertens (1944). The conventional sources are Malou ‘Notice Historique sur la Réforme Monétaire en Allemagne’ in Malou (1880), 3rd Series, Vol. 1, and the two classic books by Helfferich (1898, 1927).

355

Journal des Economistes, February 1868. According to Mertens (1944), Prince-Smith was the leader of the bimetallic lobby in Germany as well as being one of the most ardent defenders of free trade.

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evident, ‘there would be no point [in France's] delaying the demonetization of 5-franc coins; … on the contrary, there was everything to gain by getting it done as quickly as possible’.356 The Swiss ﬁnancier, Feer-Herzog, said in 1871, There are two billion in Germany waiting to be converted into gold … The State which demonetizes ﬁrst will do so at only a small cost, whereas the one which hesitates and waits will take all the losses resulting from previous demonetizations and pay for everyone else. The German economists have perfectly understood … what their country stands to gain by taking prompt action.357 So France and Germany would have embarked on a ‘race for gold’, embittered by the resentments of defeat. The point is easily recognizable. It can be characterized as a free-rider argument: As Russell (1898: 215) put it, ‘States were afraid of employing silver on account of the depreciation, and the depreciation continued because the states refused to employ it’. This interpretation may certainly go some way towards explaining the logic of the ‘scramble for gold’ (Gallarotti 1995) once the ﬂight from silver had begun. But to understand how the process was set in motion we need to ascertain the actual consequences of Germany's reform. Were the demonetization of the old thalers and the minting of new marks truly capable of dragging France on to a de facto Silver Standard? To ﬁnd out, it is necessary to study the nature of the ‘game’ being played by France and Germany in the early 1870s and, more particularly, the economics of the monetary interaction between the two. First, we need to distinguish between the effects of the War Indemnity and those of the German currency reform per se. Both have been often presented as aggravating each other. Technically, the Indemnity was meant to help the German Empire to negotiate its transition to the Gold Standard, since the only way to go was ﬁrst to acquire gold and then to sell silver: otherwise, Germany would have found itself without a circulating medium. But the latter sale of silver, once gold had been acquired, would have mostly served to rebuild the balances of the Empire, which the acquisition of gold would have depleted. In the end of the day, the amount of gold Germany needed to acquire was bound to coincide with the amount of silver it used to have for its circulation, with a possible marginal increase due to the wealth effect which a richer Reich could have on its citizens. The 5 billion francs Indemnity surrendered to Germany by France would, once the reform was completed, be used to increase imports, deposit capital abroad, invest; there was no reason why all of them should be hoarded in coin form. As Machlup recounts, at least 2.5 billion were ploughed back into France (from 1873 to 1876) in the shape of trade deﬁcits. Thus the Indemnity as such had only a slight inﬂuence on metal coin demand in Germany. Minting records show that from 1871 to 1876 the German Empire, which held very little gold in 1870, struck only 1.4 billion worth of gold marks,

356

1870 Survey, Vol. I, p. 194.

357

Quoted by Russell (1898: 105).

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Fig. 8.3.German circulation (mark millions)

Source: Mertens (1944, Table 43). the equivalent of about 1.8 billion francs.358 As Fig. 8.3 shows, Germany's circulation, gold and silver combined, increased no more than moderately after 1873.359 Thus the blow that Germany inﬂicted to bimetallism was limited to its exchanging its silver circulation for gold. Available assessments conﬁrm that Germany had about 2 billion francs’ worth of specie in circulation around 1870–1 and 3 billion in 1873, after which the ﬁgure remained stable.360 Since France, for its part, had an estimated 5.7 billion in gold at its disposal in 1873, Germany's specie could have been ‘swapped’ for part of France's gold stocks without upsetting the ratio's stability, allowance being made for some short-term disturbances and adjustment lags.361 France's circulation was

358

Soetbeer (1889).

359

The reader may conveniently recast this analysis in the terms of the discussion in Chapter 7.

360

Figure 8.3 is constructed, for 1872 to 1879, using the calculations by Helfferich, (1898: Vol. II, p. 393) and, for 1870, from Soetbeer (1889). The ﬁgure of 2 billion for 1870 was the one most commonly agreed upon. Wolowski's uses it in his testimony to the 1870 Enquiry, and so does Feer-Herzog in the quote given earlier. Helfferich (1927: 174) claims that when the German reform began (in 1873), Germany held 1,735 million marks worth of silver and 245 million marks worth of gold.

361

It can readily be seen that that a country's changeover from one standard to the other does not affect the ratio, providing that its total silver holdings are less than the gold holdings of the bimetallic country. In this case, the substitution takes place on a one-on-one basis. The country which switches its standard exchanges its silver holdings with the bimetallic country against gold at the legal exchange ratio. The change of standard thus entails no more than a simple reallocation of stocks. But, since the gold assets of the bimetallic country are depleted, the likelihood of its ﬁnding itself on a de facto Silver Standard is increased.

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therefore fully capable of enduring Germany's reform without being forced on to the Silver Standard. There was another pathway, however, by which the demonetization of silver across the Rhine could have affected bimetallism. The impact of the rise in silver production was calculated in the previous section on the assumption that all nations’ policies concerning the choice of their standard were left unchanged. That is to say, the effect of a change of standard decided upon by a given country was ignored. But a decision of this nature affects the structural demand for the two metals and so alters the bounds within which relative gold and silver resources must lie in order to remain compatible with commercial ratio stability: the result of a change over from silver to gold is that the structural demand for gold rises, while the structural demand for silver falls, meaning that every addition to the silver stock now faces a smaller market. This puts greater pressure on the bimetallic country. When a country ‘deserts’ the silver bloc and moves to gold, this has the effect of raising the bounds of the resources ratio: in particular, the point at which the bimetallic economy tilts over to a de facto silver standard goes upward. The threat then is destruction of the system by the combined action of rising silver production and currency reform. This eventuality is examined in Fig. 8.4, where the structural impact of Germany's reform is shown. (Box 8.1 describes the methodology for computing the new, ‘post reform’ bounds.) Figure 8.4 points to an unequivocal conclusion: the double standard could easily have resisted the combination of the German reform and increased silver production. Silver would probably have been dominant in bimetallic circulation, but this would not have destabilized the ratio.

Gold, silver, and transaction costs If bimetallism did not suffer from any fundamental structural weakness, and if it remained perfectly sustainable despite a changing economic and political environment, the reasons for its downfall must be sought elsewhere. The third theory reviewed here concerns the constraints attached to the operation of bimetallism. It rests on a cost–beneﬁt style of analysis. In the view of Redish (1990, 2000), the fact that gold and silver holdings must adjust endogenously under a bimetallic regime creates a serious asymmetrical problem. The role of the double standard, in her reading, is to provide the economy with the two metals in combination—gold for the large transactions and silver for petty ones. When silver is the metal that leaves a country, smaller-denomination coins (for which silver is the preferred metal) start lacking, and this scarcity can lead to disastrous payment problems. Such a system is thus inferior to a monometallic (presumably Gold Standard) system which uses alloy coins (coins with an admixture of cheaper metals) for small purchases and giving change.362 But the small change money itself stumbles on a

362

The term alloy coins is used to designate smaller-denomination coinage, usually made from non-precious metals, whose intrinsic value is less than the legal value, as is the case with today's metal coins.

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Fig. 8.4.Why Germany's reform dit not matter

Source: Author's calculations. challenge for it is, according to Angela Redish, easy to counterfeit. Only the steam press, in this account, is capable of producing high quality, hard-to-counterfeit alloy coins. This explains why bimetallism (a supposedly inferior regime) must yield to the Gold Standard, with the steam press playing the role of catalyst. Angela Redish ﬁrst applied her reasoning to England (Redish 1990) before transposing it to the French economy (Redish 1995, 2000). The British side of the argument has come under criticism (Selgin 2002). As mentioned in Chapter 6, we did not ﬁnd evidence in the Mint archives of any superiority of the steam press in terms of quality. Even more strikingly, we observed that the introduction of the steam press in the Paris Mint by the Rothschilds in 1845 actually ushered in what might be called the heyday of the bimetallic regime. In any case, we feel that Redish's reasoning is suspect, for we doubt the seriousness of the problems posed in the 1850s and early 1860s by the shortage, which was not uniform in every region, of smaller-denomination coins. It is true that the rarefaction of silver, which followed the gold-ﬁnds, was responsible for some discomfort, as the

THE FRENCH CRIME OF 1873

Box 8.1. Evaluating the structural effects of the German reform We assess here the impact of the defection of a silver bloc member that goes over to the gold bloc. It should be remembered that the parameters which serve to calculate the ‘metallic boundaries’ are a function of structural parameters of monetary and non-monetary demand for each metal, which is to say:

mg and ms have been estimated. It can be shown then that μg/k = 1.564 and μs/k = 1.619. We can also identify the real money balances of a given Silver Standard country (e.g. Germany). It is, in terms of the bimetallic country's GNP, equal to:

where βs is the size of the German economy in relation to the French economy and ks is the Cambridge coefﬁcient of the German economy. According to available estimates of the relative size of the two economies and their respective propensity to hold specie (derived from Chapter 4, Mitchell (1980); LevyLeboyer and Bourguignon (1985); Soetbeer (1889)),

where k is the propensity to hold specie in the bimetallic country. Assuming that a country that changes standard does not change its money demand function, we therefore obtain these new parameters for aggregate gold and silver demand in the non-bimetallic blocs:

By importing these latter formulae into equilibrium equations deﬁning mg and ms the new structural limits on gold and silver resources can be calculated. These were used to construct Fig. 8.4. (Note that the conclusion is robust to errors of estimation. Supposing for instance that Germany's reform either doubled or instead halved that country's demand for specie would not alter the conclusion.) The new equilibrium effects are mg = 0.43, ms = 0.32. In other words, a rise in gold production would now have less impact on the French economy than before the reform. This is because a larger proportion is absorbed by Germany. By contrast, a rise in silver production would have more impact, because Germany would no longer be taking any of the silver output for its circulation.

187

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Illustration 8.1.Seyd on shipping charges

This table is reprinted from Seyd (1868: 257). As can be seen the two metals are essentially perfect substitutes and in general no distinction is made between gold and silver, except for shipments to Panama and Valparaiso. Reported fees show, a contrario, how small differences could be. Source: Seyd (1868: 257).

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reports of the ad hoc Commissions (such as that of 1861) testify.363 There is no evidence, however, that the situation was calamitous. The 1850s and 1860s were a time of heated monetary partisanship; the enemies of the double standard could well have exaggerated the shortcomings of the system they wished to reform; that was part of the game. Some testimonies of the Commissions betrayed a desire to malign the French system, just as some others did the opposite, and this should be seen for what it was. The government, after much delay, hesitation, and back-pedalling (none of which betokens much urgency), ﬁnally decided to solve the problem by issuing small-denomination coins of inferior ﬁneness. Under the Act of 25 May 1864, the silver content of the 20- and 50-centime coins was reduced to 835 thousandths (of course, only the State could then issue this type of coin). The measure, by making arbitrage more expensive (the new coins’ intrinsic value was 7 per cent less than their face value), protected the smaller-denomination coins from being exported.364 The actual issues of these coins give a clue to the economy's modest needs. In 1864, 7.5 million in 50-centime coins and 100,000 francs in 20-centime coins were distributed. The ﬁgures for 1865 were 8.5 million and 500,000 francs. All in all, for the whole country, that amounted to barely 50 centimes a head.365 The words ‘dearth’ or ‘famine’, used to describe the need for small change in the 1850s and 1860s, are thus hyperbole. At most, there was a pang of hunger. The solution found by the government, moreover, showed that the operation of bimetallism and the question of small coins were different problems. The technique of reducing the ﬁneness of the smaller denominations made it possible to separate the two. With this simple scheme (already tried out with success in the United States in 1853 and in Belgium, Switzerland, and Italy a few years later), the small coins, which nobody would want to export or remelt, were able to coexist with the larger ones (silver dollars or 5-franc écus), which could be used in bimetallic arbitrages for stabilizing the commercial ratio. The double standard, thus equipped, could do its job of regulating the exchange ratio between the two metals, while ensuring the convenience of transactions. There is another variant of the same family of arguments, which holds that transaction costs were higher under the double standard than under gold monometallism (Lévy-Leboyer 1977b; Gallarotti 1990, 1995; Redish 1990, 1995, 2000). As Lévy-Leboyer puts it, ‘Better a wallet of louis than a satchel of écus.’366 Yeager (1976: 276), in like manner, asserts that ‘silver was more expensive to export than gold for any given value.’ In this ‘Northian’ account of the emergence of the Gold Standard, the search for efﬁciency is what put the double standard to rest.

363

Rapport sur la Question des Monnaies Divisionnaires d’Argent, Imprimerie Impériale, Paris, 1862.

364

The measure was later extended to 1-franc and 2-franc coins as part of the constitution of the Latin Union. The Rothschild archives contain an instructive note warning of the danger of trying to arbitrate with debased coins. It is said in the note that silver would have to appreciate by 6% in order to prevent a loss (Archives Rothschilds, correspondence, 1868).

365

It is unlikely that the motive for this skimpy issue was the cost to the government. The issue of under-ﬁne specie entitled it to a seigniorage equal to the reduction in ﬁneness less manufacturing charges. Levasseur (1912: 272) estimated the revenue collected by the State at a little under 3 per cent per coin.

366

Lévy-Leboyer (1977b: 421).

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

This theory, while superﬁcially attractive, is also ﬂawed. For one thing, bullion shipping costs were ﬁxed on a value, not a weight, basis (Illust. 8.1). This meant that the two metals were roughly on a par where international transactions were concerned. Certainly, silver was a little more difﬁcult to manipulate and entailed some additional expenses (for bagging, counting, packing, etc.), but the extra cost was fairly insigniﬁcant, as Fig. 8.5 shows. The choice of one or other metal for shipping abroad depended, in any case, on more than a comparison of immediate transaction costs—it was determined also by the price at which the metal could be bought and its price on the market to which it was sent. After 1865, for example, British importers of French goods were, as we have seen, not particular about settling their purchases in gold or silver, given the relative price of the two metals in Paris and London. The depreciation of silver after 1870 caused large amounts of it to stream into France; it had become the best means for a foreigner to pay for his purchases of French goods. Even if it had been in the collective interest of dealers to give up the double standard, it is doubtful whether individually they could have refused silver. Under the bimetallic rules, individuals competed to gain from using the metal which was depreciating.367 There was no simple microeconomic advantage to be had from abandoning the double standard, and coordination among interest groups was probably not easy to achieve, as will appear in the next section.

The political economy of monetary standards The fourth and last theory postulates political factors as being the reason for the disappearance of the double standard (Baas 1984; Gallarotti 1995). Gold, the theory claims, was the metal of the haves (urban merchants, bankers, the ‘educated’ classes) who favoured price stability. Silver and the double standard had the backing of the have-nots (rural classes) who favoured inﬂation. Brieﬂy put, the emergence of the Gold Standard was a direct expression of the social and political changes taking place in Western society.368 Karl Marx would have certainly agreed. In the United States, this interpretation appears to be corroborated for the period stretching from the 1876 speech given by Jones, Senator for Nevada and big silver-mine owner, to the defeat of Bryan in the Presidential elections of 1896. Jones had explicitly associated the fall in prices with the demonetization of silver, whereas Bryan was trounced for espousing a reintroduction of the double standard. In those years, the political opposition on monetary matters sat quite nicely with political theory. During the protracted price decline that took place between 1873 and 1896, we ﬁnd the partisans of monetary orthodoxy and ‘sound currency’, among whom were possibly counted the

367

In the case of national transactions, it is clear that the efﬁciency of the payment system depended not on the kind of metal used but on the development of clearing methods. For example, in Hamburg, where the standard metal was silver, bankers had centralized their reserves in a common depository; balances were cleared by simple book operations. In this case, bullion shipments were reduced to nil and silver performed just as well as gold.

368

According to Gallarotti (1995), the victory of gold over silver reﬂected the victory of industry over agriculture.

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Fig. 8.5.Shipping costs between Paris and London 1850–80

Source: Tate (1852), Archives Rothschild, Seyd (1868), Haupt (1881). holders of capital, opposed to a party of debtors made up of farmers anxious to relieve the burden of the mortgages they had taken out to buy land and machinery.369 The farmers were indeed the recruiting ground for the ‘silver men’, who were generously ﬁnanced by the gold dollars of the silver producers. As Eichengreen (1995) demonstrates, an analysis of the 1896 election returns, viewed as a referendum on the monetary question, reveals a clear split between industry and agriculture, the former supporting gold and the latter supporting the double standard.370 A similar case could be made for the other industrialized countries, at least after 1875. The international campaigns for the double standard led by Cernuschi and others, including the Rothschilds, after 1873, the ‘bimetallic leagues’, which ﬂourished almost everywhere in the 1880s, the pamphleteering of the last quarter of the nineteenth century, all bear witness to the existence of a pro-inﬂationary movement especially well-entrenched in the farm areas. The drop in prices after 1873 affected farm products more than manufactures. It lowered purchasing power and aggravated debts in rural areas, thereby creating a desire for currency depreciation. In France, this situation motivated the position of the ‘agrarian’ Méline, who appealed for a return to the double standard and increased import duties on agricultural products.

369

See, for example, the journal of the same name (Sound currency ), which was one of the gold lobby's publications.

370

Eichengreen (1995) computes the correlation between the respective vote counts for Bryan, champion of bimetallism, and McKinley, supporter of the Gold Standard, and a set of socio-economic variables reﬂecting the opposition between industry and agriculture.

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Yet, as Kindleberger (1985) remarks, the issue at stake here was not so much gold and silver in themselves as the optimal level of inﬂation. This is exactly where the political model falls short of telling us anything meaningful for the period before 1873. For until then, gold, not silver, was the inﬂationary metal, and with good reason. Its production had greatly increased since 1848; it was ﬂooding the European markets; and it depreciated in relation to other commodities, silver excepted. The controversy over standards in the 1850s (Sayers 1933) was indeed a battle between sound money advocates and inﬂationists, but the roles of the two metals were reversed. The free trader Chevalier was calling for silver monometallism, which alone could stave off the social ruination promised by the use of gold; Belgium, Holland, and Switzerland, countries typical of the liberal bourgeois spirit of the time, were trying in vain to wall themselves off from the gold zone by switching to silver; and the ‘Second Empire Keynesians’, as Kindleberger calls them, were pleading for gold-plated inﬂation which would bring wealth, jobs, and economic recovery.371 There was nothing set in stone or ideological about these preferences for the two metals or the three possible regimes associated with them. Gold was not, by nature, the favourite of the creditors’ lobby any more than silver was that of the debtors. What was important was the economic situation. The facile distinction between creditors on one side and debtors on the other does not stand up to close examination. The big bankers ﬁrmly backed the double standard, not only during the 1840s and 1850s but also after the free minting of silver was interrupted. As the experience of the Rothschild shows, this was certainly the case in France. It was true in the rest of the Continent as well. Stern (1979), shows that Bleichröder, who was Bismarck's banker, was against adopting the Gold Standard at the end of the 1860s. The case is similar as regards the alleged opposition between urban and rural interests on monetary matters, before 1873. While it is true that some leading industrial ﬁgures of the time (such as Schneider, for instance372) supported gold, there were also large fractions of the country's trade interests whose views were less clearcut as the 1868 Monetary Survey demonstrated. Furthermore, until then there had been no organized farming lobby in France. The countryside was cut off from the monetary debates, which were an urban class issue. Agricultural interests, where they received mention, were only indirectly involved. As we saw in Chapter 2, the functioning of arbitrage in the 1860s tended to concentrate silver in the more backward part of the country. As a result, when policymakers debated a possible change of standard, they immediately raised the spectre of a reform that would require demonetizing the silver held by ‘workers and plough-hands’. There were expressions of concern by the government, unwilling to stir discontent among the peasantry, which constituted its prime electoral base. But that did not make an ‘agricultural position’. It was only after the scrapping of the double standard—and in part owing to it—that the material interests of the countryside found common ground with the partisans of the remonetization of silver. The standard political theory is therefore disqualiﬁed by its anachronisms.

371

See Chapter 4 above and Kindleberger (1985). It is evident that, during the 1850s as in the 1870s, the backers of one or another form of inﬂation (e.g. gold or silver) generally controlled the revenues accruing from the monetization of the metal they supported.

372

Plessis (1985b: 125–6).

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2. A NEW VIEW OF THE EMERGENCE OF THE INTERNATIONAL GOLD STANDARD: THE STRATEGICAL THEORY RECONSIDERED Externalities versus switching costs: Stable bimetallism, 1850–70 Having demonstrated that bimetallism was viable, we must explain the causes of its demise. For this purpose, it is important to understand the historical context of the famous mid-nineteenth-century controversies on bimetallism and the Gold Standard. It has often been observed that the 1860s, which began with the Anglo-French treaty, were years of considerable expansion in world trade, and of growing European integration. Between 1860 and 1870, intra-European trade grew from about 59.5 per cent to 65 per cent (see Table 8.1). This wave of free trade brought into evidence the advantages of improving communications. Import duties had to be reduced and transactions facilitated. Economic interests generally favoured a world currency, as modern analysis has emphasized (this is McKinnon's (1963) criterion of an Optimum Currency Area).373 However, as John Stuart Mill famously put it: ‘So much Barbarism … still remains in the transactions of the most civilized nations, that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own’ (Mill 1894: Vol. II, p. 176). Notwithstanding, the period was characterized by a growing agitation in favour of currency uniformization, motivated by the desire to reduce transaction costs. The logic underlying these movements can be clariﬁed by analysing the results of the monetary survey that was conducted in France in 1868 to which we referred in Chapter 2. Part of the Enquiry had consisted in polling chambers of commerce on their position towards a change of monetary standard as opposed to maintaining the status quo. Although everybody supported the general notion that France's policy should take into account the standard of the country's main trading partners, there was a good deal of controversy among the chambers of commerce as to what was the most suitable metal. The main source of disagreement was that every region tended to favour the currency of its main trading partner. Regions trading with gold nations tended to vote for gold, whereas regions trading with silver nations voted for silver. Map 8.1, which illustrates the results of the Enquiry by presenting the majority opinion in a given Table 8.1. European and intra-European trade Value (F million) 1860 1870

X + M: Export + Import European 19,530 trade Intra-Europe- 11,600 an trade

Source: Bairoch (1973, 1974).

373

See Flandreau (1995a, 2000).

1880

Percentage 1860

1870

1880

30,270

38,580

100

100

100

19,720

24,650

59.4

65.1

63.8

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Map 8.1.Votes of the chambres de commerce (1868)

Source: Enquête de 1868. The map was constructed on the basis of the information provided by the various chambers of commerce regarding how they felt about a possible move to gold. For each chamber, we report the opinion of the majority. Four reactions were observed: oppose any kind of alteration of bimetallism; oppose any kind of modiﬁcation that would raise doubts about the value of silver écus (ﬁxed exchange rate with gold); support a reform to gold with silver becoming a trade currency (no ﬁxed exchange rate with gold); and support a full adoption of the Gold Standard. One chamber (Cherbourg) reported that no majority emerged and is not represented on the map. The size of the various chambers is represented on the basis of the aggregate discount business of the Bank of France's subsidiaires in corresponding town, taken from Levasseur (1912: 285–6). chamber weighted by the relative size of this chamber, reveals a number of telling contrasts. Atlantic and Mediterranean ports, which had extensive trade links with South America and Asia, as well as some Eastern industrial centres, such as Strasbourg which traded with Germany, Austria, or Holland, opposed silver demonetization, arguing that

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bimetallism offered a convenient way to settle balances with Silver Standard nations.374 (An exception was Besançon, which traded mostly with franc-based Switzerland; but Switzerland, being at that time part of the bimetallic Latin Union and thus subject to arbitrage, had a circulation composed mostly of gold, just like France.) On the other hand, towns located along the Seine River (Paris, Elbeuf, Rouen) or in northern France (Amiens, Saint-Quentin, Arras, Abbeville) usually favoured the Gold Standard, for gold was the only commodity they needed to trade with England or Belgium. In each case, the degree of trade integration (often linked with geographical proximity) motivated preferences for one metal over the other. Of course, given that about half of France's aggregate trade was with England, those who favoured gold clearly outnumbered those who favoured silver. A similar pattern can be discerned in other countries, although we lack the detailed source of information that we have for France. In Germany, for instance, campaigns for the introduction of a gold currency developed through Handelstage meetings in 1861 and 1865. In these gatherings, a number of leaders of the commercial and industrial communities recommended the adoption of a Gold Standard in order to facilitate foreign transactions (Mertens 1944: 112–23). A minority, however, opposed these moves on the grounds that it was preferable for Germany to stick to the silverrelated Austrian system, since Austria was the main trading partner for several lesser states.375 In 1868, a third Handelstag meeting convened in Berlin. A majority vote decided that Germany, in addition to moving to a Gold Standard, should base its coins on the French unit. This was precisely the time when French merchants trading with Germany opposed silver demonetization, on the grounds that it would help trade with Germany. The contradiction very well illustrates the mechanism at work. Voting in the Dutch parliament on the monetary question also followed the forces of gravity. The areas close to Belgium favoured abiding by the decisions of France and its Latin Union partners, whereas the rest of Holland would rather have followed Germany.376 Even the British were at that time ready for a partial debasement of the pound that would bring it down to match a proposed 25-franc gold coin that had emerged from the 1867 International Monetary Conference as a basis for a global currency. The Report of the Royal Commission on International Coinage shows a majority of witnesses supporting currency reform, and

374

See the testimony by Percheron, Paymaster-General of the Bas-Rhin Department (Enquête sur la Question Monétaire (1870 Enquiry) (1872: Vol. II, 79)): ‘As to the Gold Standard unit, we have nothing against it; but we are opposed to abolition of the 5-franc silver coin … In Alsace, we should not like to see the 5-franc silver coin abolished.’ The argument sometimes proceeded along strange lines: if silver were to be demonetized, Oriental exporters would turn to other buyers, and so deprive France of a source of supply. In the 1868 Survey, for example, the Haut-Rhin Department declared (Enquête Monétaire de 1868, p. 97),France, under the present monetary regime, has, at least as regards 5-franc silver coins, become the world's great reservoir. If this system were abandoned, France would be deprived of a source of prosperity. Silver, as commodity, would ﬁnd other markets, and the countries of the East where all purchases are paid for with silver coin would get silver from somewhere else, to the detriment of French importers of goods.

375

See Ministry of Foreign Affairs archives, FA 29600bis .

376

See Paris Mint archives, Series K.

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Luca Einaudi (2001) discovered from archival evidence, that behind the scenes, England came very close to making the move. The forces at work may be described as resulting from what economists call ‘strategic externalities’. There is a tendency to favour the currency used by the main trading partner. As a result, the utility of using one particular currency is an increasing function of the number of agents who have already adopted it. The logical outcome would be the adoption of a single currency (Kiyotaki and Wright 1989; Matsuyama et al. 1991). Of course, by themselves, these externalities were not likely to produce any speciﬁc system. A Silver Standard, for instance, might equally have had emerged. Strategic externalities imply only that everything ends up being ruled by path dependency. In the 1860s, the odds were favourable for gold. Britain (the main trading nation of the time) was on gold and, owing to the Gold Rush and bimetallic arbitrage, the members of the Latin league (France, Italy, Belgium, and Switzerland) had a large proportion of their circulation in gold. To resume, England's pre-eminence, plus the Gold Rush, aided by the logic of bimetallism, were tilting the world system towards a gold basis. This logically culminated in the votes of the 1867 International Monetary Conference in Paris, where the 25-franc gold coin unit was adopted by Western governments as the basis for an eventually global Gold Standard. Is this to say that the emergence of the Gold Standard as a global regime in the 1870s was a pure result of network externalities? Not quite. The non-binding agreements reached in 1867 soon revealed stumbling-blocks, whose importance became obvious when the technical aspects of the reform came under discussion. A well-known result in the theory of competing currencies is that the advantages of having one common monetary standard have to be set against substantial switching costs and feasibility constraints (Dowd and Greenaway 1993). Several large countries, when faced with the actual expenses of the reform, were much less inclined to move to gold. In France, demonetizing silver around 1865–70 would have required getting rid of (at the very least) one billion francs in écus, according to our estimates, and contemporaries had even higher ﬁgures in mind. Since this reform would also have meant France relinquishing its role as an arbitrageur of last resort, it is not clear how the écus could be sold at par. Losses were almost certain. Alternatively, some institutional scheme for pegging the value of the écus might conceivably be devised, but it was not clear how. Besides, the government was warned that if the reform went awry, this would be a blot on the escutcheon of the regime (a serious problem in a period when the right to vote was being extended). Since écus were then primarily located in the countryside, there could be protests among the agricultural classes. In the 1868 Survey, the PaymastersGeneral (Trésoriers Payeurs Généraux) had been asked what, in their opinion, would be the public reaction to the prospect of demonetization. Some of them were sanguine,377 and the majority warned against the measure's unpopularity. In the Allier Department, for example, the Paymasters said that ‘no small shopkeeper

377

In the Var Department, for example, the Paymasters declared that, ‘in some villages, there could be temporary high feelings when it became known that the real value of the 5-franc coin had fallen.’ (1868 Survey, p. 103.)

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would want to be given a 5-franc coin that he knows could be refused.’ In the Seine-et-Oise Department, they said that it would be ‘impolitic’ to do away with the 5-franc coin. And in the Rhône Department, the opinion was that ‘loyalty would be revolted to see the ﬁneness of the 5-franc coin reduced to 835/1000. It would be … a grudge against the government.’378 Why, then, change a system that had preserved exchange rate stability with all kinds of trading partners, and had performed quite well up till then, especially as altering it might anger a portion of the population? Whence the reluctance of successive Ministers of Finance (Fould, Rouher, and Magne) to dismantle bimetallism. Germany's situation was even more delicate, as acknowledged by the Prussian delegate to the 1867 international conference.379 Germany's reliance on imports of raw materials made it especially preoccupied over having a convenient means of payment to purchase the goods it required through London (if not from England).380 Moreover, Germany's exchange rate stability against gold nations was indirectly achieved through France and the operation of bimetallism. This meant that the fate of Germany's exchange rate stability in terms of the pound lay in French hands. Lastly, the northern German states joined together since 1866 in a German confederacy were thinking of unifying their currencies, and had accordingly transferred monetary decision-making power to a proto-federal parliament. For them, the possibility of a re-coinage made it a good moment to reshape Germany's monetary system. On the other hand, Germany had an estimated 2 billion marks of silver thaler in circulation and, because of this, was the country for which the changeover to gold would be the most daunting. A move from one standard to the other could not be achieved overnight. It was not possible to throw 2 billion in silver on to the international markets before going to bed and wake up the next morning on a Gold Standard. The only option available was to begin by purchasing a certain amount of gold (for instance by ﬂoating a large loan), then implementing gold convertibility, and eventually selling silver thalers on world markets. Hence, as Taussig summarized it in a pioneering study (1927), two difﬁculties had to be faced. First, Germany had to solve the ﬁnancial problem (secure the resources to purchase gold); second, it had to solve the liquidation problem (be able to dispose of silver on good terms). Both problems were colossal. The minimum amount of gold needed to initiate the reform may be estimated at about 1 billion marks. This is indeed the amount coined by Germany between 1871 and 1873, before it launched the transition to gold (Hefferich 1898). But the average revenues collected by the Imperial (federal) government after 1875 amounted to only about 600 million Reichsmarks. The reform thus required an

378

1868 Survey: 97, 101, 103, respectively.

379

See Conférence monétaire internationale de 1867.

380

See Milward and Saul (1973: 428):There were obvious weaknesses in Germany's economic position in 1870 … Sources of supply [for the major industries] were more unsure, for Germany did not have the world empire of her European rivals and the domestic raw material base was already inadequate to sustain the developments which had taken place. Raw materials accounted for 62.5 per cent of all imports in 1869 and raw materials for the textile industries alone accounted for 31 per cent.

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outlay that vastly exceeded annual means and could not even be imagined in the late 1860s. Before 1870, there was no easy way in which a not yet uniﬁed Germany could borrow such funds. It is a well-known fact that in the late 1860s, Prussia, which was leading the uniﬁcation movement, was desperately short of cash (Stern 1979). Worse still, borrowing to move to gold had to be achieved with the help of the ﬁnancial elite of the time, which, as related above, uniformly opposed this policy. Germany's silver liquidation problem was no less awesome. One possibility was to obtain France's passive cooperation, that is, sell silver and hope that arbitrageurs would not be thwarted by the monetary authorities in their buying of demonetized thalers and selling of French gold coins. Given the huge size of Germany's circulation, it was unlikely that French ofﬁcialdom could be taken by surprise. Our conclusion is that while there was an important political ingredient in the monetary debates of the 1860s, the battle-line between groups was not quite the one mapped in recent works. Instead of the divide between town and country, we must recognize a more subtle set of cross-currents, some running at the very core of the bimetallic economy. We ﬁnd opposition between the bankers who ran the international payments system and the French traders who sought the best instrument for paying for their imports; between the buyers of English machinery and the importers of Oriental products; between the economists who advocated a ‘rational’ solution and the politicians who had to think of the transaction costs of putting it into practice. The advent of the Gold Standard cannot therefore be boiled down to a victory of industry over agriculture, and less again to a triumph of class. It is difﬁcult even to regard it as a success for the gold lobby. Instead, the debates in the 1860s over the adoption of the Gold Standard reveal that two key factors shaped the controversies. The microeconomic element of strategic externalities and economies of scale that was pushing towards currency uniformization was counterpoised by constraints associated with moving from one standard to the other. This stalemate, which was even more pronounced for Germany than for France, in turn stabilized the policies of smaller nations, whose monetary system was largely tied to that of their larger partners.381 Thus at the end of the 1860s, the sky seemed to be clearing for bimetallism, as Wolowski (1870) noted with satisfaction. With the constitution of the Third Republic, after the French defeat in the Franco-Prussian war, bimetallism had on the surface every reason to gain the upper hand. The power of the Rothschilds seemed to be at its apogee, since they were the middlemen in the issue of the indemnity loan. The feisty reformers, like Chevalier and Parieu, who had held the high ground under the Second Empire, were gradually nudged aside. And the Rothschilds’ friend, Léon Say, who had defended bimetallism before the Société d’Economie Politique, became Minister of Finance. The double standard was ﬁnally, so to speak, in the driver's seat.382

381

See Eichengreen and Flandreau (1996b) for an account of how the problems of small and large countries differed in the following period.

382

See, along the same lines, Bouvier (1967: 209 of the 1992 edition): ‘In 1871, with Say at the Préfecture, Alphonse de Rothschild had an ally and new source of information in the new State apparatus. He would now become the veritable banker of the new regime.’

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199

The market, the government, and the bank: Bimetallism destabilized The starting-point of our account of the emergence of the Gold Standard is France's loss of the 1870 war and the Treaty of Frankfurt, which suddenly inundated Germany with 5 billion francs in international bills, most of them convertible into gold. This obviously solved Germany's aforementioned ‘ﬁnance’ problem and, in 1871, it decided to adopt the Gold Standard. In 1873, it laid down the exact terms for the changeover. The French government realized the implications of Germany's policies, which disturbed the double standard, already badly shaken by inconvertibility. But it did not wish to take snap decisions. The German government's actions on the bullion market were provoking a drain of gold and an inﬂow of silver that had worried Paris. The French government, in order to reduce the danger of inappropriate action and at the same time cushion the impact of what was going on across the Rhine, chose to ‘protect’ the national circulation by temporarily limiting the minting of silver. The Decree was promulgated on 6 September 1873, just after the payment of the last instalment of the indemnity to Germany. This seemingly innocuous Decree triggered a complex series of circumstances that would culminate in the abandonment of the double standard. It was the pebble that started the avalanche. The Ministry of Finance, unlike the economists who were predicting a tidal deluge of silver, did not appear unduly perturbed. The archives show that the government was relatively conﬁdent in the double standard's ability to sail through what was perceived to be a temporary crisis. The main thing was to avoid being penalized by the effects of Germany's demonetization, and there was no political reason for abetting it. The restriction on silver minting was a natural temporizing decision to take while waiting to see what turn events would take. As Léon Say put it 3 years later, ‘In monetary matters, it is important not to move faster than the nation, and habits. Existing prejudices should be respected, and we should proceed with extreme deliberation.’383 Ofﬁcially then, the decisions of 6 September and their reinforcement on 19 November 1873 were a temporary response to a ﬂeeting problem; they did not address the issue of the monetary regime. This was the line adopted by the Ministry of Finance throughout the entire period. The instructions given by the Minister of Finance, Magne, to the French government delegation at the Latin Union Conference due to be held in January 1874 are evidence of this stubborn position. The metal silver, under the inﬂuence of a possible demonetization by North Germany, has undergone a depreciation over the past several months which is making it ﬂow towards the minting houses of the four Union countries in abnormal quantities. This fact in itself being cause for attention, the Belgian and French governments, spontaneously and without prior understanding, limited the making of coins in their minting houses. It is a purely prudential measure which in no way preﬁgures a change in the monetary system itself. Its purpose, on the contrary, is to protect it from the consequences of an incidental circumstance and keep it intact in its normal form.384

383

‘La Question Monétaire}’, p. 68, in Les Finances de la France sous la Troisième République.

384

Paris Mint archives, Series K (our italics). The note goes on,There should be no debate on the foundations of France's monetary regime; and, if the case arises, debate in this area should be declined; the issue should remain perfectly intact. It is inadmissible that, for each of the countries concerned, the matter should be resolved by any but the country itself. All the more so in that the interests in play are dissimilar and disproportionate, as they are among the countries united by the 1865 Convention.Soubeyran dutifully represented the ofﬁcial view, as the published minutes show. Right from the outset, he declared, ‘It would be outside the Conference's scope to engage in speculations and discussions on the world's trade balance. The task assigned to it is to take the most appropriate measures for attenuating the present inconveniences which, in my opinion, have been greatly exaggerated.’ In Soubeyran's view, the Conference minutes reported, these inconveniences were the ‘passing consequence of the disturbance created, for the moment, by the payment of the war indemnity, the inconvertibility in certain countries, the new German monetary law, and the unfavorable trade situation in the Far East’ (Minutes of the 1874 Monetary Conference, p. 21).

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Along similar lines, Dutilleul, the Director of the Treasury (Mouvement Général des Fonds), declared in 1875 that he wished to leave no uncertainty as to the motives which had guided the French Administration when it had ordered a limitation of silver minting in 1873 … The measure did not in the slightest imply an intention of moving towards a single standard. The Administration, seeing the normal conditions of circulation threatened by external and incidental factors, wished immediately to take a precautionary measure that was essentially revokable.385 Again in 1876, Léon Say, back in charge of the Finance Ministry, expounded the same French position, later called the ‘wait and see’ policy (‘attitude expectante’), to the Senate. Monsieur de Parieu would like us to take a step towards the Gold Standard and a step towards demonetizing silver. I am not of this opinion. Everything in the drafting of the Bill which to me seems to be an engagement in favour of the single Gold Standard and the demonetization of silver, I reject. Everything in the drafting, on the other hand, which shows that we wish to maintain the status quo, and have no foreordained intention, I support.386 (Illust. 8.2) The ofﬁcial policy of the 1870s so continued on directly from the conservatism of the ﬁnal years of the Empire. The government was persuaded that the 1873 decisions left all monetary policy options open. Through the restrictions on minting, the arrival of silver in the currency supply could be controlled, while the appearances of the Act of Germinal were preserved. The compromise rested on a faulty reading of the problem. Bimetallism offered two strict choices only: either the monetary authorities accepted the operating principle of the double standard, namely the endogenous response of the gold-to-silver breakdown of the national currency supply; or they tried to control the composition of the nation's specie stock (e.g. by limiting the minting of silver), in which case they could not count on private arbitrages for guaranteeing

385

1875 International Monetary Conference, p. 60.

386

Say (1892: 66). This goes to explain the fury unleashed against the Ministry by the Gold Standard's supporters. See, for example, Parieu's Senate speech (21 March 1876) in which he publicly tongue-lashed Léon Say after having tried to win him over in private (letter to Léon Say, Paris Mint archives, Series K).

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Illustration 8.2.Parieu, bimetallism, and the Gold Standard The cartoon represents Felix Esquirou de Parieu, a prominent supporter of the Gold Standard, battling the French government in Parliament. On the bottom left part of the drawing, a cross-bow throws at the ‘world’ (symbolized by a globe) books on which is written ‘bimetallism’. Using his sword, on which is written ‘speech made before the Senate, March 21 1876’, Parieu ﬁghts back protecting a statute whose pedestal reads ‘International Gold Standard’. The cartoon, from the satirical newspaper Comic-Finance, ‘which does not accept stock exchange orders’, illustrates the extent to which contemporaries did not see that the legislation adopted in the 1870s truly pushed the world towards a Gold Standard.

Source: Comic-Finance, 30 March 1876.

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

the value of the two metals as coin. For as long as silver could be minted freely, its intrinsic value (plus manufacturing fees) could not descend below its nominal value. The market, as we have seen, took care of maintaining its price. In the opposite situation, the restriction on silver minting prevented the market from playing its stabilizing role. As mint vouchers maturities increased, silver bars depreciated (Fig. 8.6). This raised the problem of the écus’ value. By what mechanism could it be ﬁxed? There was a chance, providing the markets could count on the monetary system soon returning to normal, that the restrictions on silver minting could go fairly much unnoticed.387 In a context where some people were advocating the demonetization of écus, however, the 6 September and 19 November decisions conveyed mixed signals. They could be read as a drift towards abolishing the legal price of silver coin. The markets started becoming jittery; they wondered what the next step might be. On 2 December 1873, the Rothschilds wrote to their man at the head of the Bordeaux mint, saying that ‘they would be very pleased to have any information [you] might have as to the government measures in preparation concerning the coining of silver.’388 In June 1874, there were calls in Parliament for the Cabinet to clarify its intentions.389 The restrictions on silver minting had ﬁnished by denting the credibility of the 15.5 mainstay of bimetallism. If we are to understand the mechanisms at work, we must remember what would have happened in the event of demonetization. The écus withdrawn from circulation would have had to be sold as commodity. The price of silver would then have plummeted, down to the level at which speculators might have agreed to buy it with the hope of disposing of it at a proﬁt at some later date.390 Agents confronted with this scenario (or even the possibility of its coming true, which amounted to the same thing) could not stand idly by. As in musical chairs, the one who got caught by demonetization with his coffers still full of silver would have suffered severe losses. It was urgent to liquidate écu holdings. Silver was accepted only if it could immediately be handed on to a third party.391 But who could be that third party? In December 1873, the 5-franc coin suffered a slight drop in its quoted value (one thousandth), for the ﬁrst time in the history of

387

According to Mertens (1944: 268), the 6 September decision was at ﬁrst kept secret. But what hope was there of hiding the secret since the minting shops would have been obliged to extend their vouchers’ maturity once the daily quota of 280,000 francs had been reached, thereby giving the game away to the market? The Paris silver price curve shows a drop immediately after the 6 September decision. The secret lasted for hardly 1 day.

388

Archives Rothschild, correspondence Matières.

389

Journal Ofﬁciel, 18 June 1874.

390

This interpretation is similar to that of Salant and Henderson (1978) in connection with the Gold Standard. The likenesses between the liquidation of silver reserves in the 1870s and that of the gold reserves in the 1970s would be a good subject for study.

391

Archives Rothschild, letter of 18 April 1874, correspondence Matières.Silver is being more and more disdained here. The maturity of Paris Mint vouchers is 21 November and the metal's price has consequently fallen greatly. The Banque de France is taking Paris Mint vouchers on discount for three months unless the discount is renewed for a further three months. These terms enable the small number of operations carried out locally to be dealt with. It is also still possible with some loan establishments to negotiate large amounts in 4⅜ per cent mint vouchers.

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203

Fig. 8.6.Maturities of Mint vouchers and silver depreciation (left-hand axis: number of months. Right hand axis: commercial ratio in Paris)

Source: Rotschild archives, Correspondence, and Paris Mint archives, Series K, and Soubeyran's statements in the Minutes of the 1874 Conference. bimetallism (Fig. 8.7). This discount, while hardly visible, revealed that people were preparing to treat écus as a vulgar commodity. There were several consequences to this. The ﬁrst one was to drag the Banque de France into the process. The Bank could not refuse the coins, which were still legal tender; agents could therefore use the Bank to buy cheap ‘insurance’ against demonetization. Switching from écus to billets, they would be able, should silver be entirely demonetized, to exchange their notes against gold at a later stage. This amounted in practice to the Bank backing the price of silver coins, whose discount in effect never exceeded 0.2 per cent and eventually disappeared at the beginning of 1875.392 As Luzzatti (1883) later explained, the Banque had become the guarantor of last resort of the écus’ value.393

392

This is why the discount on silver remained low. It corresponded to the arbitrage cost of taking écus on the Paris Bourse and conveying them to the Banque de France.

393

Luzzatti (1883). This point takes us back to a discussion begun in Chapter 5. Bloomﬁeld claims that, after 1880, the possibility open to the Banque de France of redeeming its notes with silver served to protect its reserves. If the Banque had used silver exclusively, however, the rate for notes would have nose dived down to the intrinsic value of silver. Seen from this angle, payment in silver was probably less effective than manipulation of the gold sale-point by the institute of issue.

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

Fig. 8.7.Price of silver and écus on the Paris market

Source: Statistical annexes and Paris Mint archives. The constraints imposed by this role substantially changed the Banque's attitude towards the double standard. The increase in its silver reserves in no way strengthened its position, since it could not afford to trade away its écus without stirring public protest (Fig. 8.8).394 The bloated stock of écus was a serious embarrassment in many ways. The Banque could not run the risk of écus entirely displacing the gold in its reserves. If the Banque had found itself short of gold, it would have been forced to give silver only in exchange for its notes. But with nothing to guarantee the écus’ value, except that they were convertible into notes, which hopefully at some stage could be cashed for gold, the Banque de France's notes would themselves loose value.395 As Léon Say wrote, ‘The danger facing France's circulation … with a bank holding half gold, half silver

394

This is the sense of the complaints heard when the Banque attempted after 1875 to withdraw a certain quantity of notes from circulation and replace them with silver. Contrary to the thesis of Ramon (1929) and Lévy-Leboyer (1977b), this did not signify a sudden preference for banknotes; it was merely a protest against the Banque's unloading its écus.

395

Just how much remains to be determined. In practice, the restriction on silver minting meant that the écus were worth as much as the asset from which they were produced (silver). The restriction was equivalent to a bottleneck on the route between metal and coin. It was what was called ‘starving’ (see Eichengreen and Flandreau 1996b). The experience of several countries such as Spain and India, which limited silver minting without introducing convertibility to gold, suggests that the post-suspension equilibrium would have lain somewhere below the gold par and above the silver par.

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Fig. 8.8.Banque de France reserves as % of circulation

Source: Statistical Annexes. would be serious if … public opinion started encouraging the government and the Banque de France to pretend that their silver reserves were a currency guarantee of the same order as their gold reserves.’396 The Banque de France thus found itself in a quandary. The government's initial decisions had made the markets apprehensive, so precipitating a run on écus that was resolved by forcing them into the Banque's reserves. The fact of holding such vast quantities of them made the Banque all the more anxious to guarantee their value and acceptability. Since the Banque would have sustained frightening losses in the case of a panic, it continued to battle the gold lobby, which was pushing for demonetization. At the same time, its guarantee could not be reconciled with a large increase in the circulation of écus, for this would have endangered the convertibility of its notes into gold and consequently created a threat to the franc itself. It was thus in the Banque's

396

Léon Say, preface to the French translation of Goschen's Theory of Foreign Exchange. Likewise, Pareto at a later date (Pareto 1964: 360), wrote:At 7 March 1895, the Banque de France had 2,148 million in gold and 1,239 million in silver as cover for its 3,604 million francs of notes. The latter cover is an illusion and is partly comparable in worth to a public debt …. It is doubtful whether more than 500 million could be raised on the international market from the mass of silver held by the Banque. If it had the same amount in its coffers, but in gold or treasury bills, it would be in a situation at least as good as the one it is in at the moment.

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MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

vital interest to obtain a suspension of silver minting: the Banque thus became, in reality if not in words, the most powerful supporter of the Gold Standard. This situation was further complicated by France's membership of the Latin Union. Under the terms of the treaty concluded in 1865 with Belgium, Italy, and Switzerland, each country's gold and silver coinage could circulate freely among the other Union states. The Union governments were committed to taking the specie of the other members as payment in their public treasuries. The treaty made no provision, however, for controlling the different members’ issue of currency. For as long as the price of ingots remained roughly equal to the coins’ value, as had been the case under ‘well-behaved’ bimetallism (before 1873), the lack of controls did not pose any problem, since markets wiped out any seignorage there might be. At the end of 1873, however, the fall in silver prices which followed the minting restrictions opened the door to unscrupulous practices of ‘free riding’ (Flandreau 1993). This was especially so, as the restrictions were accompanied by national Decrees in Belgium and Italy whereby their Finance Ministers granted themselves the exclusive right to mint silver. Each government thereafter could be tempted to issue large quantities of écus and fob them off on their neighbours. They could in that way pocket the difference between their face and intrinsic value. Italy, in fact, began to do precisely that.397 The Latin Union, in an attempt to conjure these dangers, met at the end of January 1874. The Italian government stridently proclaimed that it had no desire to rein in its minting. The Banque de France thus felt threatened by not only ‘domestic’ issues of silver but by foreign ones as well. Yet, in somewhat surprising fashion, the Latin Union came to serve the Banque de France's interests. Under the terms of the 1865 treaty, the Banque de France was not obliged to accept foreign currency; this obligation concerned governments only. So, a few weeks before the 1874 Conference, the Banque ostentatiously refused several payments in Italian écus. It was its way of showing its ﬁrm intention of discriminating between domestic écus—whose value it was ready to defend—and foreign écus which could go to Hades. As only the Banque de France had enough muscle to prop up the price of Italian silver, Italy had to cave in.398 The Latin Union decisions inevitably had an impact on Germany's transition. In 1874, instead of being able simply to swap its silver coin for gold, Germany found itself hobbled by the silver-minting restrictions. It had used part of its war indemnity to buy gold but had not been able to dispose of its old thalers. The fall in silver prices inﬂicted apalling losses on the German government, compounded by the fact that every time sales were envisaged in London on behalf of the Empire, the market price plunged in anticipation of future liquidations.399 The result was a suspension of silver sales while the world waited for France to snap out of its ‘attitude expectante’ and agree to resume silver minting. France, meanwhile, had no reason to repeal its restriction measures while

397

Concerning this episode, see Flandreau (1989, 1993, 1995d). The subject of the decentralized Monetary Unions’ inﬂationary tendencies has been studied by Casella and Feinstein (1989).

398

See Luzzatti (1883).

399

Salant and Henderson (1978) describe the action of almost identical mechanisms when the Federal Reserve liquidated its gold stocks in the 1970s.

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Table 8.2. Coinage of écus and issue of Mint Vouchers following restriction on minting (francs) Quotas

Production

Remainder 31.12.1873 1874 1875 1876 1877 Total 1878 (1 Sept.) 1878 Combined total

— 60,000,000 75,000,000 54,000,000 27,000,000 216,000,000 — — 216,000,000

Mint Vouchers delivered 5,130,770.91 59,996,010.00 75,000,000.00 52,661,315.00 16,464,285.00 209,252,380.91 1,815,650.00 1,370,248.79a 212,438,279.70

Mint Vouchers redeemed 25,215,271.18 53,727,219.62 99,641,489.52 32,175,672.81 — 210,758,653.13 — — 210,758,653.13

— 54,477,919.31 77,178,473.01 32,281,682.27 43,348,733.70 207,286,808.29 2,096,698.29 1,325,146.84b 210,758,653.13

Source: Archives de la Monnaie de Paris, Série K. Mint Vouchers were distributed as follows (FF):

1873: Paris 18 174 192; Bordeaux: 7 040 078 1874: Paris: 36 576 269; Bordeaux: 17 150 950 1875: Paris: 89 146 738; Bordeaux: 10 494 752 1876: Paris: 23 672 543; Bordeaux: 8 503 128 Rothschild archives indicate that in 1874 they subscribed about 15 million francs of Mint Vouchers from the Bordeaux Mint. That is about 75% of the total. Note: a Production outstanding. b Vouchers outstanding. They were vouchers contracted by the House of Rothschild during summer 1876 with the Bordeaux mint. Delebecque, director of the Bordeaux mint shop, embezzled the metal, which was never coined.

under the threat of the silver balances still held in Germany. It was a game that could go on forever. When Germany ﬁnally gave up the idea of disposing of its old thalers, only one third of its initial holdings had been sold. The Latin Union followed a very similar path. After several years of low-gear minting in line with the 1874, 1875, and 1876 quotas, the Banque de France was granted its wish and obtained a total suspension of écu-minting. As the Paris Mint archives tell it,400 Governor Rouland, in concert with Finance Minister Say, drafted and obtained passage of the Act of 5 August 1876, which put a halt to all fresh minting of silver in France.

400

Letter dated 9 June 1876 from Rouland to Léon Say (Paris Mint archives, Series K):Dear Mr Minister, I presume, not having been able to attend in the Senate today, that, since my report cannot be distributed until tomorrow Saturday, the discussion will be scheduled for Monday next. I therefore wish to be given your orders as to the details of this discussion, and as to the way to treat amendments which are different, and sometimes quite identical, and hence as to the modest share you would like to leave to the Rapporteur; the important subjects of systems and principles are necessarily the province of the Minister, the natural and so eminently authorized defender of his Bill. Will you agree for me to see you tomorrow morning at around ten, or Sunday morning? I am entirely at your disposal, Dear Mr Minister, and assure you of my respectful and devoted regards. (Sgd) Rouland.

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Ecus nonetheless remained legal tender.401 The Banque had won its battle. ‘Limping bimetallism’—an awkward form of the Gold Standard—was born.402 Table 8.2 shows the decline of silver coinage in France.

3. CONCLUSIONS The retreat from bimetallism was the involuntary and strangely paradoxical outcome of the combined action of players who had nothing against the double standard to begin with—government, bankers, the Banque de France. It had all begun with the lack of international cooperation that had followed the Franco-Prussian war. These decisions interacted with the mechanics of bimetallism to hasten its collapse. The French Administration, forgetting the pivotal role of the market over 70 years in stabilizing the commercial ratio, thought it could impede bimetallic arbitrages while preserving the 5-franc écu's value. Its decision made ﬁnancial circles shiver; they were unwilling to hold écus unless their market price was guaranteed. The Banque de France then agreed to act as guarantor but only on the condition that the free minting of silver be stopped once and for all: as limping bimetallism emerged, the Banque became the mainstay of this new regime, which lasted until 1914. In many ways, the disruptive processes at work were the mirror image of the stabilizing system that had reigned over the previous 70 years. The whole machine went into reverse, and the forces that in the past had contributed to the commercial ratio's stabilization were now helping to undermine it. A method had suddenly to be invented for guaranteeing the price of silver that everyone now shunned. Since the monetary tribulations of the early 1870s had led to the Banque de France being granted a surfeit of power, it was now that same Banque which became the institutional cornerstone of the destruction of silver's monetary role. Some lessons are to be learnt. First, the political acts leading up to the extinction of the double standard obeyed a sequential pattern marked by a limited amount of rationality. Germany's policy could to some extent be described as irrational, since it was based on the false assumption that France would not react to the liquidation of the thalers. The French decision, which might have seemed the prudent course of action before, could hardly be regarded as perfect after. Second, the whole affair highlighted the difference between rules and practice in the development of the international monetary system. The Gold Standard may be said to be the result, not of a conscious reform based on the rational adoption of common principles, but of a chaotic process of muddling through. Many of the famous ‘Gold Standard anomalies’ listed by Bloomﬁeld (1959) could well be revisited in the light of the bimetallic origins of the classical Gold Standard. The Banque de France's practice of sometimes redeeming its notes with silver, to which Chapter 5 alluded, was not a

401

From that date on, the only coining done corresponded to the mint vouchers outstanding falling due.

402

The French expression was ‘bimétallisme boiteux’. The image suggested that the two legged bimetallic system now limped, owing to its hampered silver leg. For some reason, the English literature occasionally refers to this system as ‘limping Gold Standard’: but how can one limp, when one has one leg only?

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transgression of some set of unwritten and undiscoverable Gold Standard rules. It was rather the expression of the freedom accorded to the Banque de France to use silver coin, providing (and the proviso was a heavy constraint) that in the long run it ensured parity with gold coin. It was, moreover, a legacy of France's bimetallic past. Third, it must be stressed that—contrary to the hackneyed view of central banks being created as lenders of last resort with the mission of compensating for the market's errors and protecting it from its own follies—the Banque de France developed as guarantor of exchange stability and guardian of silver reserves largely out of the panic inspired by the government itself. The market had not betrayed its function; the government had rather failed to trust the market. Afterwards, there had been no choice but to plug the holes that had been opened. This brings us to the last point. Many accounts of the Gold Standard contrast its heyday (1880–1914) with its nadir (between the two World Wars). According to Eichengreen (1992a), the breakdown in international cooperation is generally blamed for accentuating, or even causing, the economic crisis of the latter period, a view which we criticize elsewhere (Flandreau 1997b). But we found that most of the ills conventionally laid at the door of the inter-War years (coordination problems, faulty assessment of the international consequences of domestic policies, and, above all, Franco-German rivalry) were key to the establishment of the Gold Standard, and probably the long period of deﬂation that stretched from 1873 to 1896, which was once called the Great Depression—before another, even more terrible, depression wiped it from people's memories. But that is what economic historians are here for—to remember.

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Conclusion As people sow, so they will reap; and the harvest to be reaped here is indeed something worth striving for, let shallow theorists and would-be philosophers pretend to deride it or despise it as they may. It is the bright glittering Gold, the shining Silver—it is wealth, which, when honestly gained and properly used is as good a thing as this world has to show; and the successful honest trader of the present day, whether an individual or nation, may proudly inscribe on his money-box the motto—honni soit qui mal y pense Seyd (1868: 534) So ends the story of the monetary consequences of the Californian gold ﬁnds. While a number of speciﬁc lessons can be drawn from the arguments in the previous chapters, a few broader comments on the international monetary system that reigned over the period 1848–73 are in order before we bring the tale to a close. The ﬁrst one relates to the dynamics of international monetary regimes. As we saw, in the space of 30 years, the rocketing production of gold had—through a concatenation of macroeconomic, institutional and, ﬁnally, political mechanisms—shifted the world from bimetallism with a virtually ﬁxed ratio between gold and silver, to a uniquely gold base. If a few of the determining factors driving this process had to be identiﬁed, what would they be? The Belgian economist, Jacques Mertens, in an incisive and, at least in the English language literature, little-quoted essay, writes that, if he were asked to name one decisive cause, he would point to the Gold Rush. Without massive gold discoveries, the bimetallic nations on the Continent and elsewhere would have continued to operate with a predominantly silver circulation, and Germany would never have found the gold it needed to change its standard. Let us qualify Mertens's conclusion even if it means weakening its punch. The Gold Rush, we demonstrated, was not by itself able to transform the international monetary system. If one aspect of its consequences on Western European economies should be emphasized, it is its moderate macroeconomic effects—apart from the large currency substitution it induced. Moreover, as we observed, a number of factors in the late 1860s, by deterring moves away from the prevailing system, truly stabilized bimetallism. Something more was needed to cause the downfall of the existing state of affairs and its replacement by a gold-based regime. This something was the Franco-Prussian war and France's subsequent defeat. Without Bismarck, without Sedan, world monetary dynamics might have been different. The international monetary system of the late 1860s was at the crossroads, and this explains the intensity of the controversies on the Continent and throughout the world

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concerning the ‘Monetary Question’, the ‘Question Monétaire’, the ‘Quistione Monetaria’, the ‘Wahrungsfrage’, etc. By recognizing this, we admit what the event owed to history. The Gold Standard, this book argues, was an accident of history, and this simple conclusion should lead to a revised judgement of its later record. We shall have achieved our goal, if we have managed to change the desperately deterministic way in which the history of the international monetary system of the nineteenth century is so often told in modern handbooks and unresearched, or sometimes researched, accounts. The rise of gold and the uniﬁcation of leading monetary systems on a gold basis were not the only possible outcome of the forces at work. Moreover, if we make a point-by-point comparison of the record of bimetallism and match it against that of the Gold Standard we cannot help being struck by the fact that the former stands up very well. Consider exchange rate stability: while a certain lazy way of writing and reading monetary history typically attributes an impressive record to the Gold Standard, we ﬁnd that stability under bimetallism was very nearly equivalent, and in any case much closer to that achieved under the Gold Standard than either regime in comparison with subsequent ones. In that respect, the Gold Standard was merely a way of pursuing an approach to stability which had begun much earlier and owed nothing to gold—quite the reverse, since pre-1873 exchange rate stability had been achieved despite gold. Similar conclusions may be reached if we look at interest rates and ﬁnancial integration. One may be puzzled, for instance, by the high interest rates correlations between gold and silver nations in the 1850s and 1860s (Flandreau 1995a). In effect the British market interest rate hikes in 1866 surrounding the Overend, Gurney panic had much severer repercussions on German rates in Hamburg or Berlin than on French rates, despite German states being on a Silver Standard while England was on gold. The ideas developed in this book should help to understand this seemingly bizarre phenomenon, by explaining how the bimetallic arbitrage performed by international ﬁnance, with the French monetary system as its treasure chest, tied together the gold and silver segments of the global money market. Financial integration could then proceed on a stable exchange rate basis, and work its way round apparently disparate monetary standards. From which we see that this book has inappropriately sacriﬁced to common and, we argue, improper parlance in referring to the ‘French’, ‘British’, or ‘German’ economies. These notions, in fact, covered a much more seamless world where the political and ﬁnancial topography did not always coincide. A recurring theme of this work has been its emphasis on monetary geography: the world of bimetallic arbitrage knew no boundaries. Monetary laws certainly deﬁned a gold zone, a silver zone, and a bimetallic zone. But the market had gradually smoothed out this initial distinctness, to the point where the bedrock of the international payments system had become continuous. Economic distances then mattered much more than political or institutional ones in deﬁning real proximities. In the era of international bimetallism between 1848 and 1873, globalization had not needed a Gold Standard to exist and develop. One implication of this is that the facile and widespread association of the Gold Standard with global ﬁnancial integration should be rejected. One Harvard professor recently described 1870 as an age

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213

of ‘ﬁnancial autarchy’ as opposed to 1914 which was an age ‘of globalization’.403 Nothing could be further from truth. Of course, that does not mean that bimetallism between 1848 and 1873 was a mere variant of subsequent regimes. It was that, where ﬁnancial integration and exchange rate stability were concerned. But the resemblance stops there, for we believe that 1873 was a watershed. The pre-1873 regime had probably more in common with earlier regimes than with later ones. The system of those years, unlike the very ordered arrangements largely dependent on the central banks that developed with the Gold Standard, was very decentralized. It was based, not on a juxtaposition of domestic systems whose monetary authorities dealt with external macroeconomic constraints, but on a superposition of microeconomic constraints. It is traditional to remark that in a commodity money system, bullion acts as the system's nominal anchor. More fundamental for our discussion is the fact that bullion can generate its own stabilizing mechanisms, and that these rest on private incentives. Specie, which was universally necessary and available, followed the call of proﬁt, according to each market's supply, demand, and trading technology. The holders of metal stocks had only to serve their own interests to maintain or restore world monetary equilibrium in decentralized fashion. Economic institutions to handle resulting international ﬂows in turn ‘naturally’ developed, with a number of leading ﬁnancial marketplaces emerging as the ‘hubs’ of this multi-centric system. The hubs played a key role in resource allocation—the distribution of money. The speed of response owed everything to a closely-knit fabric of ﬁnancial intermediaries who, little by little, had established and enlarged the international monetary communications highways. This helps to explain why the bimetallic regime was capable of absorbing large-scale monetary change with amazing ease. Through its networks, it was able to radiate shocks ﬁrst felt in mufﬂed form in London, Hamburg, or Paris away from Europe to places like New Delhi, Shanghai, or Calcutta—or possibly more remotely still as this book has shown, to the ‘deserts’ of France, whose provinces were sometimes more foreign than countries abroad. The qualities of the ‘horizontal’ system described are reﬂected in the remarkable absence of ‘adjustment difﬁculties’ over the period at issue. In the modern world, external adjustment difﬁculties are associated with the organizational machinery by which the central monetary institutions decide to ‘adjust’ the economy to ‘external’ pressure. This poses acute political dilemmas since authorities have to decide whether or not to pass the adjustments on to the economy—through a tightening of monetary policies, for instance. In the privately operated pre-1873 system, where arbitrage was everything and banks of issue meant little, it was quite different—adjustment did not operate top-down; it really did work cross-wise. Private dealers had to keep an eye on their solvency, and therefore hold metal stocks in reserve to cover payment requirements. The demand for monetary assets, whether gold or silver, was directly related to planned transactions. Bullion ﬂows were the reﬂection, not so much of net disequilibria, as of the

403

Williamson and Clemens (2000).

214

MACROECONOMICS: BIMETALLISM'S SUCCESS AND FAILURE

arithmetic needed to keep metallic balances at the desired level. National constraints, being the sum of private solvency constraints (with the States acting as legal watchdog rather than macroeconomic agent), were therefore necessarily respected. They were nothing but the aggregation of individual constraints across a given region. Probably the most radical effect of bimetallism's replacement by the Gold Standard was that it took the primary responsibility for managing the global monetary system away from private concerns. The uniformization of the monetary base meant that exchange rate stability could now be achieved by correctly behaved monetary authorities. The time was now ripe for central banks to commandeer an ever-increasing proportion of international bullion assets—a trend which accelerated after 1873. Many economists, agreeing with Ricardo, for whom a Gold Standard with the gold totally centralized in the bank of issue's reserves was economically superior to a regime where it was in private hands, have regarded this trend as progress in terms of economic efﬁciency (Wicksell 1962; Bordo and Jonung 1981). Gold is sterile, and if its use can be restricted by centralizing its management, then so much the better. In this view, the centralization of reserves is a ‘pure’ economic improvement. This normative reasoning makes light of the fact that, as the banks of issue took possession of an increasing fraction of national precious metal stocks, they changed the nature of the system. Confronted with a deﬁcit, they might decide to neutralize the effect of a drop in their reserves. Since agents had become accustomed to trading in the central bank's money, their assets were no longer directly connected to their international position, because that position was intermediated by the institute of issue. The disconnection between microeconomic and macroeconomic solvency, which is at the origin of ‘modern’ monetary policy, raised a whole set of difﬁculties. In a horizontal system such as that of 1848–73 gold and silver price differentials sent agents clear messages as to the relative scarcity of specie. A centralized system by contrast ‘banks’ the market gradually and changes the nature of the information contained in price signals. As centralization proceeded a set of procedures then became crucial to structuring central bank operations, and macroeconomic rules became essential. The question thus revolved on the ‘credibility’ of monetary institutions, which boiled down to making sure that they behaved as though they did not exist in the ﬁrst place. The fact remains, however that these monetary institutions were national ones. Thus the emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency. It will be remembered that Karl Polanyi, in a famous work (Polanyi 1944) which economic historians quote more and more these days but seemingly do not read, made 1873 a turning-point in global political relations: 1873 did not primarily in his account mark the birth of the global exchange rate system about which modern economic historians are so lyrical. It was, according to him, the year when economic internationalism began giving way to nationalism, the year when the seeds of the inter-war collapse were planted. The important conclusion here is that the force driving the international monetary system's evolution is, ﬁrst and foremost, change in the national and international monetary power structure; it is deﬁnitely not the search for efﬁciency.

THE FRENCH CRIME OF 1873

215

This book would not be complete if we did not give, in conclusion, an idea of the economic cost of monetary stability under bimetallism. It is possible that the French economy's well known penchant for maintaining a substantial specie circulation was the consequence of bimetallism's action as an international regime. The bankers, in order to meet the French economy's demand for money, needed no urging to supply it with specie—gold or silver, according to which metal was available at the best price. In the bimetallic context, the operation always raked them in a proﬁt. Since at nearly all times there was a metal tending to depreciate, French bankers seldom felt the pressure of scarcity, which would have obliged them to intensify their search for alternatives. As Cairnes noted in the 1850s, the absorption of gold was determined ultimately by the relative capacity of the different economies to build up their money supply by replacing specie with substitutes. He rightly foresaw that the United States and Great Britain, where paper money was already widely used, would take in a fairly modest proportion of gold ingots, whereas France would import and mint very large quantities. So let us assume that the Californian discoveries strengthened, or in any case facilitated and maintained, the French economy's tendency to depend on metal. This is arguably a fair measure of the cost of bimetallism. But if we try to estimate the loss that France suffered on account of more extensive use of bullion, we come up with laughably small ﬁgures. Taking as our benchmark the assumption that, after 1845, France, owing to a change in its monetary system, would have succeeded in reducing its dependance on bullion to match British standards, we arrive at a cost that, at worst, would not have exceeded ½ per cent of GNP:404 a small stipend to pay indeed for having provided nothing less than three-quarters of a century of international monetary stability.

404

Calculations based on the method used by S. Engerman (1970) to assess the economic consequences of the liquidation of the Second Bank of the United States.

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Appendix A. Bullion Quotations on the Paris Bourse and London Stock Exchange 1. Paris On the Paris Bourse, gold and silver were quoted 6 days a week. The operators on the market were the exchangebrokers, and the prices recorded are those at which they concluded their transactions. Bullion quotations were recorded as premium (prime) or discount (perte) with respect to a reference price, the Tarif. When a metal's price rose above the reference price, it was said that ‘a premium or advantage must be given’ on top of the Tarif. In principle, the Tarif corresponded to the price at which the Mint took in the equivalent of 1 kg of pure ore brought for exchange (matières portées au change, that is, bullion brought for coining). In 1803, for example, with a minting price of 9 francs per kilogram of gold and 3 francs per kilogram of silver—both for metal ths pure—the reference prices were (since 3,100 and 200 francs, respectively were minted with these quantities):

The minting price for both gold and silver changed over time, however (see Fig. A.1 below). The initial Tarif was referred to as the ‘trade tariff ’ (Tarif du commerce), whereas the Tarif of the day was called the ‘mint tariff ’ (Tarif de la Monnaie). As Ernest Seyd noted (1868: 299), ‘In dealing in Gold it is always ﬁrst agreed whether the price shall be ﬁxed by the Tarif de la Monnaie, meaning the present rates of the Mint, or by the Tarif du Commerce, as the old Tariff is now termed. For Silver the latter is generally taken.’ In the source we used (Cours Authentiques des Matières d’Or et d’Argent, Ms Folio 310, Archives de la Monnaie de Paris), the reference chosen for quotations was jotted down in the margin of transaction statements, removing all confusion. True to Seyd's remark, the ‘trade tariff ’ was used for silver, while gold was quoted on the basis of the ‘Mint tariff ’. The resulting reference price was 3,434.44 until February 1835, 3,437.77 until March 1854, and 3,437 thereafter. The gold–silver exchange ratio may thence easily be calculated by combining the series of premia on bullion and the relevant reference prices. Figure A.1.Coinage fees

Source: Matigny (1859).

218

APPENDIX A

2. LONDON Gold and silver were quoted in London twice a week, on Tuesdays and Fridays. Trading took place on the Stock Exchange, along with transactions in bills and securities. Various forms of bullion (ingots or foreign currency such as Mexican dollars) were traded. The main quotation for gold and silver was the price per standard ounce of each metal. For silver, the standard was 37-fortieths (or 92.5 per cent) of ﬁneness, and the price was quoted in pence. For gold, the standard was 11-twelfths (or 91.66 per cent) of ﬁneness, and the price was quoted in pounds, shillings, and pence. Owing to the narrow ‘bid ask’ margin set by the Bank of England on the gold price, the price of gold was basically the Bank buying price, except when ﬁnancial crises led the authorities to suspend the Act of 1844 (as in 1857). But for most practical purposes these minute differences do not matter, for the period under study, and the price of gold can be arbitrarily (but safely) set at either the Mint price of 3£ 17s 10½d or at the bank purchasing price of 3£ 17s 9d. The major data-collecting difﬁculty lies with silver. Existing silver quotation series are not continuous. Until the late eighteenth century, the chief source of stock exchange prices, The Course of the Exchange, published by the brokerage ﬁrm Castaing since the late seventeenth century, had contained a silver price report (see Neal 1990: 24). Its successors in the ﬁrst half of the nineteenth century (such as Luytens and Ripley) left it out. Only in 1859 did the Wetenhall house of brokers (which for a few years at the end of the eighteenth century had assumed publication of The Course of the Exchange) step into the breach and regularly include silver quotations in its weekly review. For the period before 1859, we must rely on indirect sources, such as The Economist. Indirect sources seem to have lacked regular information on these matters. Reported prices probably relied on transactions performed by one correspondent broker and so did not reﬂect the entire range of possible deals. If that broker had not done any dealings on the day in question, there was no quotation. Since in London silver served mainly to pay for imports from Asia, it often happened that only a small number of bullion dealers made purchases. In that case, the quotation for ‘Bar Silver per Oz. Standard’ in The Economist is not given, and instead ‘000’ is reported. The 1840s and early 1850s contain many such gaps, despite indirect evidence of substantial activity.

APPENDIX A

219

After 1859, thanks to the coexistence of the series in The Economist and the one in Wetenhall, a nearly perfect ‘end of the month’ series may be constructed. Comparing Wetenhall and The Economist's ﬁgures shows that the two sources are close substitutes. We decided to rely on Wetenhall (since Wetenhall is the primary source), occasionally using The Economist to check for outliers, etc. The resulting continuous series may be found in the Statistical Annex. In order to work out a pre-1859 series we faced a choice between two courses. Either we could rely on The Economist (at the cost of a perhaps too large a number of missing observations), or we could rely on an alternative source. We decided to use the Wolowski series published in the 1870 Enquête Monétaire. The ‘Wolowski series’ was reportedly constructed on the strength of information provided directly to Wolowski by the London bullion brokers. It begins in the 1840s and matches very well the Wetenhall series when it overlaps with it (after 1859). It is probably therefore the best possible source for the pre-1859 period. Lastly, a simple rule was suggested by Laughlin (1885: 285) for converting the London price of silver into a gold–silver price ratio. On the basis of a gold price of 3£ 17s 10½d, calling ps the silver quotation (in pence), and pg the gold–silver exchange rate, in London, one gets: pg = 943/ps.

Appendix B. Estimate of Annual Wear of Gold and Silver Monies Michel Chevalier (1851: 109) writes that very careful experiments conducted in France under the supervision of Messrs Dumas and de Colmont on a very large number (400,000) of 5-franc coins, and interpreted by Mr Libri using probability calculus formulae, lead to the conclusion that ‘the law of wear appears to be uniform, or very nearly so, during the whole circulating lifetime of monies and, for 5-franc coins, can be situated at 4 milligrams per annum per coin.’ This equates to 16 parts per 100,000 or 1 to 6,250. Unfortunately, Dumas and Colmont did not extend their study to gold coins. As luck would have it, a survey of a broad sample of 20-franc gold coins, carried out in 1869 by the Paris Mint and quoted by Jules Malou (1880) (the returns are reported in the Statistical Annexes), enables us to estimate the average wear of gold coins as well. It is Figure B.1.Wear (Wear and tear for Consulate/Empire, Charles X, Louis-Philippe, and Louis XVIII, although used in regressions, not reported on chart)

Source: Statistical Annexes, Table K.

APPENDIX B

221

supposed that the gold coins’ annual coefﬁcient of wear (σ) is constant. With k(i) being the mean weight of the mintyear i, and ω(i) a random term, we obtain:

The regression gives σ = 0.17‰. The model explains 92 per cent of the variance. It is comforting to note that the loss rate for gold is very similar to that for silver.

Appendix C. Estimate of French Specie Stock from 1840 to 1878: A Review of the Statistical Model The following are the technical details of the model used in Chapter 4. For the sake of simplicity, it is supposed that the coin sampling obtained during a Monetary Survey is made up of a single type of coin (such as the 20-franc coin). Clearly, however, the method described here can be repeated for any type.

1. THE PROBLEM Gross circulation at a given date (Mt) can be deﬁned as the sum of all new mintings that have survived until date t (T is the ﬁrst year when minting of a given type of coin began):

If ait is the ‘loss coefﬁcient’, that is, the proportion of each ‘vintage’ (Ni) lost between the year of minting (i) and date t, we can write by deﬁnition:

The series Ni is the series of annual number of coins minted (known with full certainty). It follows that, if an unbiased estimate of loss coefﬁcients can be worked out, we can also work out an unbiased estimate of gross circulation at date t. Let âit be the estimator of ait. Then,

Otherwise stated, the question is to ﬁnd a way to estimate the loss coefﬁcient accurately.

2. THE SURVIVAL EQUATION Let us take the vector (nTt, nT + 1t,…,nit, ntt), each of whose elements is the number of coins from ‘vintage’ i counted at date t. m is the total number (all vintages combined)

APPENDIX C

223

of coins counted and examined. The proportion of each ‘vintage’ in circulation is then given by:

We know that the vector (nTt, nT + 1t,…, ntt) is asymptotically normally distributed with:

We can therefore rewrite the terms nit: with:

Then, dividing nit by Ni, we obtain the ‘survival equation’ (it being remembered that Foville's ratio, fit, equals the ratio of the number of coins counted to the number of coins minted):

in which the terms in nit (which are the ratio of νit over Ni) are asymptotically normally distributed:

The survival equation tells us that Foville's ratio contains information on (a) the losses incurred in comparison with original mintings, and (b) relative sample size. For a given sample size, Foville's ratio informs us of the scope of the phenomena affecting each vintage's mortality. It contains a sort of memory.

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THE LOSS EQUATION The metallic stock of coins may be broken down as follows:

where the ﬁrst factor stands for the losses incurred by all generations at period j, and the second factor stands for the losses that only generation i has incurred at date j. A ﬁrst-order Taylor expansion gives:

or, in loss coefﬁcient terms:

This model cannot, however, be run directly since it contains too many parameters. In order to ensure identiﬁcation a number of restrictions are needed. Three kinds of restriction are considered. First, we allow for ‘normal losses’, that is, the normal death of coins which, for instance, are demonetized because they become too worn after a certain time. This effect is supposed to be constant over time. Second, we consider exceptional losses: for example, the remelting of silver struck before 1829, etc. These are supposed to affect the vintages concerned uniformly. Third, it is assumed that at least one epoch did not incur any exceptional loss. This third assumption is akin to Foville's hypothesis, but much less restrictive, since we do not need to assume this vintage must be the most recent one. To describe these restrictions formally, we deﬁne Hb, b ∈ [1, n], the set of vintages belonging to a given epoch b when given coin types were born and later subjected to given events: for silver, H1 = [1795, 1829], H2 = [1830, 1852], … Likewise, we deﬁne Ja, a ∈ [1, m], the series of loss epochs, that is, the periods when a portion of the earlier issues was withdrawn from circulation (say exported or remelted). Lastly κa(Hb) is the total effect of phenomenon a on period b. The formulae are:

APPENDIX C

225

Note now that exceptional loss suffered by a given vintage on account of a given phenomenon can be written as function of the epoch to which it belongs and the phenomenon:

We then have the loss equation (where Θi(a, b) = 1 if i belongs to the series of vintages b, and has been affected by the phenomenon a, and Θi(a, b) = 0, else):

RUNNING THE MODEL To conclude we combine the survival equation with the loss equation, and obtain an equation similar to the one estimated in Chapter 4:

This is the model to be run. Technically, the parameters of this equation may easily be calculated by projecting the series of Foville ratios on to a plane deﬁned by a constant, a set of dummy variables (which take in the effect of the exceptional losses), and a temporal variable or descending trend (which takes in the normal losses). Estimation then serves to obtain estimates of the extent of normal and exceptional losses. Identiﬁcation of these effects requires only that each given set of vintages was not affected by two distinct phenomena at once. If it had been, only the total effect could be assessed. Given that the vectors representing speciﬁc effects are orthogonal (our chronology shows that the different effects were usually successive), this condition amounts in practice to assuming that a period must have existed during which no exceptional loss was incurred. Finally, by construction, the residuals of this equation are correlated and have heterogeneous variances. We therefore used the Generalized Least Squares (GLS) method, replacing the variance–covariance matrix (which depends on the proportions of each vintage in the total population) with its estimate reckoned from the empirical proportions. Moreover, since this matrix is singular, we dropped one observation to preserve tractability. The results are set out in Tables 4.1 and 4.2.

PUPIN'S METHOD: A TEST One advantage of this speciﬁcation is that it offers a simple method for testing the validity of competing approaches. Pupin and Sicsic relied on the direct measure of a constant

226

APPENDIX C

loss ratio. Their assumption is that the effect of exceptional losses may be ignored, and that only normal losses mattered. This can be rewritten as:

This set of restrictions, which can be tested simply by running the ‘constrained’ model, gives: Napoléons (gold)

Ecus (silver)

The normal mortality of gold and silver coins derived from these calculations differ substantially from Pupin's guestimates. We ﬁnd 0.9 per cent for gold and 1.3 per cent for silver, as against 0.5 per cent according to Pupin for both metals. This suggests that authors who have followed Pupin vastly exaggerated France's specie stock. Our results, by contrast, are closer to Sicsic's, if smaller. This makes perfect sense since Sicsic is in effect interpreting as ‘normal losses’ what is due in our model to exceptional losses. In any case, Fisher tests lead to clear rejection of the constrained model, and thus strongly favour our analysis. This is yet further evidence of the importance of bimetallic arbitrage in the demographics of bimetallic money supplies.

WHERE DO WE GO FROM THERE? The model provides consistent estimators of the annual loss rate and exceptional losses coefﬁcient. It can thus be used to compute the stock of gold and silver in 1878 more reliably than has been done so far. Moreover, as described in Chapter 4, it enables us to estimate the stock of gold and silver at given ‘turning-points’, that is, when given phenomena affecting the circulation came to an end. Finally, our estimates also provide a way for breaking down speciﬁc phenomena into a series of annual effects. For instance, it is possible to go from total bimetallic arbitrage losses to the dynamics of French specie supply by using net bullion movement statistics as an index of arbitrage intensity. Record years for gold imports or silver exports were record years of gold coining and thus arguably of silver melting. Bullion ﬂows series can therefore be used to decompose global phenomena into a succession of yearly numbers. Formally, calling the target epoch Hb, b ∈ [1, n] and the loss epoch Ja, a ∈ [1, m], we obtain (Xj being the net export during year j):

APPENDIX C

227

where κja is the estimated loss for year j and κa(Hb) is the overall loss. Finally, we give the general formula that enables construction of the specie series from the elements discussed above, (ηj(a, i) = 0 if the particular phenomenon did not act during epoch j or the particular vintage was not affected by it; otherwise, ηj(a, i) = 1):

Appendix D. The Age of French Coin in Circulation The method used here follows ideas developed by Jevons (1868). It is a sub-product of the estimation method detailed in Appendix C. Since this method provides an estimation of the specie in monetary circulation by adding up series of surviving coins, it is possible to work out the proportion of each generation in total circulation at the date of the survey. From there, the mean age of coin in circulation can be computed; it is a weighted average of the ages of the different vintages, the weights being the proportion of each generation in the total specie stock. Calling π(i) the proportion of vintage i in the total population, and A(t) the mean age at the time of the Currency Survey (t being the date of the survey), we may write:

Using this formula, Jevons estimated the mean age of sovereigns to be 15.35 years in 1868. This matched another contemporary estimate obtained by Dr Farr who found a mean age of 15.46 years. Jevons also reported that the average age of coins in the metal reserves of the Bank of England was a much younger, 7.14. Unfortunately, the ﬁndings of the Banque de France's 1878 Recettes en Ville calculations do not allow us to replicate these results for France. Yet something similar must also have been true in France since we know that the (older) silver circulation, in the 1860s, was primarily located in the countryside while the reserves of the Banque were made up of (younger) gold coins. It is obvious that the results obtained through the method we develop here can be generalized to provide a picture of the dynamics of French monetary demography, since our method gives for each date the contribution of each vintage to the overall money supply. If π(i, t) is the proportion of generation i in the total circulation at date (j), the mean age series A(t) is given by:

This is the formula used for calculating the mean age trend of French coin circulation. It is possible in principle to build the series to cover the whole period (1840–78), but we have limited ourselves to the period 1848–70 as it represents the ‘heyday’ of bimetallism. As can be seen in Fig. D.1, the gold or silver coin age trends are, in a sense, the mirror image of the workings of the double standard; the ‘scissors effect’ observed in Chapter 4 appears there in reverse. Until the late 1840s, for example, the relative cheapness of silver tended to make it the main component of new specie issues. The ‘new blood’

APPENDIX D

229

Figure D.1.Mean age of écus and napoléons 1848–70: gold and silver

Source: Statistical Annexes. thus came from silver, whose mean age was much lower (13 years compared with 28 years for gold). From 1848 on, the arrival of Californian gold tended to lower the mean age of napoléons. In the mid-1850s, it fell below the mean age of écus (about 15 years). This was the time when the proportion of gold began to exceed the proportion of silver. While silver coin aged inexorably (practically no more new coins were struck), gold coin continued to grow younger. After 1860, however, the new additions failed to offset the normal ageing of the coin population. The mean age of napoléons once again rose above the low point of 8 years that had been reached at the end of the 1850s. In 1868, it roughly matched the mean age of sovereigns as measured by Jevons. And, after 1866, the resumption of silver minting caused a ﬁnal rejuvenation of the silver coinage. The demographics of French specie were driven by the mechanics of bimetallism.

Appendix E. ‘Ordinary Banque de France Bullion Operations’ According to the Rothschild Archives The following note, found in the Rothschild Archives (132 AQ 86), dates probably from the late 1860s. It lists the Banque de France's activities on the bullion market and was probably a draft for an ofﬁcial document. Interestingly, the claim that the Banque never bought gold for premiums exceeding 7 per cent, whereas it is known that the Rothschilds collected premiums higher than that when they provided gold to the Banque de France, bears witness to the sensitiveness of the topic. (1) The Banque takes in on deposit gold and silver bars. (2) Against such deposits, it advances their value, with an average reduction of one per cent on the mint tariff price which, for silver, is 220.56 fr per kg and, for gold, 3,437 fr per kg. (3) The interest due to the Banque for these advances is 1 per cent per year. (4) Interest falls due every 36 days. A 36-period begun at the time of withdrawal is counted as a whole period by the Banque. (5) At present, as for the last seven or eight years, the Banque buys gold in ingots or coin at the ofﬁcial tariff price of 3,437 fr. (6) In certain past circumstances, and especially when the Banque's metal reserves were threatened, the Banque, in order to fulﬁll as far as possible its statutory obligations, has bought gold in ingots or coin at varying premiums, which have never exceeded 7 per cent. We have no recall of its having bought silver for this purpose. (7) At other times, the Banque also received £ in gold (sic) from the Bank of England, sums of varying size according to the needs of the moment, and this when the disparity between the two discount rates was growing too large. Needless to say, the subsequent return on these operations depended on the variations in the discount rate, which on some occasions were sudden and consequential. Putting it more clearly, we may say that these were mutual services which the two great ﬁnancial institutions rendered each other. (Insert in this paragraph) We should add that the Banque never proceeded with the above-mentioned operations without their having been approved in Assembly by the High Council. (8) The Banque also sells gold in ingots at the tariff price of 3,437 fr with a variable mark-up, which has stood for some time now at 0.15%. It is subject to the same terms as any private establishment, that is, it is to free to sell or not to sell.

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231

(9) As to silver ﬁnances, the Banque has on several occasions sold reﬁnable coins to Paris ﬁrms. On other occasions, it has preferred to have the same coinage rened for its own benet, the rened silver being returned in ingots after processing.(10) This paragraph comes last but would be better higher up, since it concerns deposits: The Banque also provides advances on coin whose value is often ﬂuctuating.

Appendix F. Gold Purchased by the Banque de France from 1855 to 1857 Table F.1. Suppliers, amounts, premiums Supplier Rothschild Saint Paul et Cie Lyon Allemand Mobilier Monteaux Fils Allard Node Langlois Vernes et Cie Durand et Cie Donon Aubry Gautier Monteaux Lunel Hottinguer Ballin Halphen Pescatore Oppermann Dierickx Pastre Berthoud Grisor De Neufville Leiden Primsel Hentsch Lutscher Hirsch Bischofsheim Marseilles Branch

Gold purchased (francs) 751,211,605 320,901,954 52,949,824 44,009,875 34,110,410 34,035,848 6,024,810 3,235,848 244,466 178,522 381,840 140,862 2,818,035 2,105,642 255,435 153,045 26,685 304,490 60,309 46,526 99,734 2,193,773 372,296 296,571 527,140 17,823,046

Source: File Crises Economiques et Financiéres, Banque de France archives.

Premiums paid (francs) 8,569,107 2,023,533 283,982 307,162 193,251 194,915 42,189 14,352 1,490 1,162 2,047 936 16,624 8,423 1,271 765 213 2,576 362 279 598 10,709 1,938 1,354 1,581 109,707

Appendix G. The Haute Banque and Economic Theory Before the 1869 Currency Commission, international bankers took a strong stand in favour of the double standard. A delegation led by Alphonse de Rothschild included the former reﬁner Poisat, Pinard (Director of the Comptoir d’Escompte), d’Eichtal (a former Banque de France Regent), and Sourdis (another banker). Alphonse de Rothschild, under attack from the monometallists, delivered a lengthy statement in which he explained the workings of the double standard in detail. Alphonse was to become one of the champions of bimetallism in the next decade. He would later offer ﬁnancial support to the Italian government on the condition that it ofﬁcially adopt a pro-double standard stance (Gille 1967: 609; de Cecco 1990). He based his doctrine on a distinction between the roles of bullion as money or as commodity. Fluctuations in bullion supply and demand produced exceptional tension every now and then on gold or silver. For equilibrium to be restored and the metal brought to where it was wanted, a ﬂow of specie, sold as commodity, had to be drained from circulation. And to induce specie to ﬂow out of the circulation as commodity, a premium had to be offered. Alphonse de Rothschild thus refused to treat slight ﬂuctuations in bullion prices as reﬂecting a change in the relative value of either metal as monies. The premium or loss accruing on ingots was, in his opinion, the natural proﬁt incentive which, in a market-regulated system, enabled the necessary private arbitrages to start: The greater or lesser abundance of one or other precious metal [has no effect] on the mutual ratio of the two metals as currency. I do not understand what the term ‘depreciated’ metal means. I sometimes see that one of the metals carries a premium because it is the more sought after. … But I do not on that account see the other one as being depreciated, in the ordinary sense of the word, that is, as having lost some of its value. An exceptional need can arise for a commodity or a money-as-commodity, but the ratio between the two metals as currency stays the same. What inconvenience is there then if one of them ﬂows out as commodity? (Enquête sur la Question Monétaire, 1870: 99, 101) Alphonse de Rothschild's statement deeply scandalized the two major monometallists sitting on the Currency Commission, Parieu and Chevalier. Like them, most historians (Bouvier 1967) have treated Alphonse's testimony as pure stupidity. To our knowledge, only Gille has stood up against this view. He remarks, ‘The problem as regards currency is more complex than may appear at ﬁrst sight. It is perhaps a mistake to write that the Rothschilds’ declarations did nothing to raise them in economists’ esteem’ (Gille 1967: 608). The banker, despite the Rothschilds’ special interest in bullion

234

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affairs, was in fact stating a general principle that would be ‘rediscovered’ by Irving Fisher a quarter of a century later. Fisher wrote: ‘It is to be observed that bimetallism can never avoid a slight premium. On the contrary, it is the difference of level which supplies the moving force for passing from one point of equilibrium to another’ (Fisher 1894: 535). For obvious reasons, the logic of arbitrages was best understood by those who performed them.

Appendix H. Notes on the Economics of Coinage We report here some evidence on coinage technology which illustrate the discussion of Chapter 6. In the Matières register of the Rothschild Archives we found a detailed (if brief) account of the costs associated with silver minting. The list of items, probably dating from the period 1870–80, is based on the 1849 Tariff (1f 50 per kilogram, or 7.5‰) on which a reduction had probably been granted since coinage fees are reported

236

APPENDIX H

at 1f 45: To the manufacturing director, for silver 1f 45 Cost to the director on ﬁne silver, alloy being needed 500 g of copper at fs 2.50 per kg [less] Other expenses (dies and blank-cutters to be refunded to the State, Checking + Administrative Inspection charged to the Mint Director) [less] Leaving a margin of

that is, 7f 25‰ that is, 1f 25‰ that is, 1f ‰ approx. 5f ‰

This suggests that standard expenses associated with coinage were essentially proportional to the amount coined. Figure H.1 (constructed on the basis of information supplied by Darnis 1988) shows the proportional relation between the amounts minted and running expenses (dies, blank-cutters, etc.). This leaves machinery, equipment, and the guarantee deposited with the State as outstanding ﬁxed costs. This suggests that minting exhibited increasing returns to scale. Figure H.1.Number of coins per pair of dies

Source: Darnis (1988: 277–8). Using the Rothschilds’ accounting as guide, we can also provide rough estimates of the manufacturing cost for gold coin around 1860. The copper alloy cost can be ignored, since it amounts to about 1/15.5 of the cost associated with the manufacturing of silver coin (1.25‰15.5 ≈ 0). Assuming that ‘other expenses’ are proportional to the value of the mint-run and about on the same scale as those for silver, the manufacturing cost for gold coin amounts to one thousandth of the value minted.

APPENDIX H

237

This estimate is conﬁrmed by the statement by Robert Anderson Hill, ofﬁcial of the London Mint, to the Royal Commission on International Coinage (1868: 93). His calculations include wages, which were ﬁxed, since the London Mint was at the time a national workshop, and its employees were civil servants. The numbers reported by Hill also support the assumption of increasing returns to scale and coinage costs slightly above one thousandth. This is illustrated in Fig. H.2. Figure H.2.Manufacturing costs (wages and overheads) at the London mint 1868

Source: Royal Commission on International Coinage (1868). The consistency of these calculations may be further checked by referring to the known proﬁts made of the Paris Mint in 1831 (Thuillier 1983: 306) amounting to 700,000 francs. In that year, the Paris minting house turned out about 59 million francs’ worth of silver coins and 43 million francs’ worth of gold coins. According to Humann's report (Rapport sur les frais de fabrication, Le Moniteur, 28 February 1835), improvements in coin-making in the early 1830s made the real price paid to the Mint dip below the ofﬁcial Tariff, closer to the new Tariff which would be introduced in 1835. With the old Tariff at 3 and 9 francs per kilogram for silver and gold respectively, and the new one at 2 and 6 francs, we obtain an average of 2.5 and 7.5 francs, producing a gross rate of proﬁt of 1.25 per cent (silver) and 2.4 per cent (gold). Assuming that minting costs amounted to 2.25 per mille for silver (the Rothschilds’ ﬁgure, circa 1870) and 1 per mille for gold (our estimates above), the net rate of proﬁt would have been 1.025 per cent for silver and 1.4 per cent for gold, yielding a total proﬁt of 60,531 + 607,017 = 667,548 or roughly 700,000 francs.

Appendix I. Bullion Production Statistics The statistics on gold and silver production deserve meticulous study in their own right. We refer interested readers to the books by Del Mar (1902), Warren and Pearson (1935), and Mertens (1944), all of which contain useful information and can be thought of as starting-points. It may be said that the period under study was one of transition from the ‘stone age’ of bullion statistics to their ‘modern’ form. Three periods, each presenting their own problems, can be distinguished. Although the period prior to 1848 is not well documented, several authors (e.g. Soetbeer 1889) have proposed series beginning with the discovery of America—or sometimes with the birth of Christ! As Hector Hay remarked (Hay 1886: 172), these were only ‘vague hypotheses’. The middle period of 1848–78 (the one which interests us most) presents us with a number of series developed independently by statisticians or economists hoping to give an empirical foundation to the debates over monetary standards. We have the 5-yearly series worked out by Soetbeer (1889), some incomplete ﬁgures provided by Seyd (reported in Hay 1886), a series from which some years are missing by the broker Pixley, the United States compilation (US Congress 1895) and, lastly, ﬁgures recorded by Hector Hay himself (1886). These different sources, where they can be compared, are broadly in agreement; they are thus good substitutes for empirical analysis. We have used Hector Hay's ﬁgures, the ones most often quoted (by Laughlin 1896, for example, who refers to preliminary spadework). They may be found in the Statistical Annex. From 1880 on, bullion production statistics become plentiful. During the 1870s, they received ofﬁcial status; as of 1876, the annual reports by the Director of the US Mint provided copious information on the state of precious metal production. These data met with severe criticism, however, from Del Mar (1902: 401–2); on that account, the usual caveats apply: In the Report of the Monetary Commission of 1876 the defects of the various methods employed to ascertain the bullion product, namely, the Export and Consumption method, the Express and Railway Carriage method, the Bank method, and the Mint Estimates, were shown at length…. After these defects and blunders were pointed out, the Mint Bureau adopted a method of collecting production statistics even worse than the previous ones. It made them up from items in the mining news-papers and from the reports of local correspondents, who obtained their news from others…. For example, all that portion of the ‘Report of the Director of the Mint upon the Statistics of the Production of the Precious Metals’ for 1882, which relates to California, was farmed out to an inﬁrm person named R. W. Hardenberg for $600. This man sublet the job to a mine-owner named R. C. Donns, of Amador, and to several others, at $30 to $50 each, making a proﬁt of $400 by the operation. Information received by the writer from R. W. Hardenberg himself, Feb. 19, 1884 …. When the Silver Question assumed political importance, the Mint Bureau, going

APPENDIX I

239

from bad to worse, adopted a most extraordinary method of guiding the public on this subject: it sent to Germany for its production statistics. These were generously supplied from the ample imagination of Dr. Adolf Soetbeer, who knew nothing about the American mines. A serious statistical study of world bullion production and distribution in the nineteenth century would considerably improve our knowledge. It is to be hoped that this deplorable gap will be remedied.

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Statistical Annexes Table A. Estimated trend in French specie stock (franc millions, annual data)

a

b

c d

Year

Gold

Silver

Total

1840 1841 1842 1843 1844 1845 1846 1847 1848 21849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878

803 801 789 776 765 751 739 731 758 771 842 1,097 1,106 1,276 1,780 2,200 2,675 3,209 3,652 4,305 4,675 4,709 4,859 5,002 5,206 5,296 5,587 5,707 5,966 6,116 6,084 5,976 5,870 5,747 5,683 5,829 5,914 6,076 6,165

1,537 1,606 1,666 1,733 1,795 1,873 1,910 1,976 2,089 2,288 2,362 2,413 2,477 2,386 2,235 2,079 1,867 1,543 1,523 1,366 1,221 1,160 1,077 1,010 967 961 954 1,002 1,089 1,141 1,188 1,186 1,179 1,327 1,380 1,447 1,493 1,502 1,496

2,340 2,407 2,455 2,509 2,560 2,624 2,649 2,707 2,847 3,059 3,204 3,510 3,583 3,662 4,015 4,279 4,542 4,752 5,175 5,671 5,896 5,869 5,936 6,012 6,173 6,257 6,541 6,709 7,055 7,257 7,272 7,162 7,049 7,074 7,063 7,276 7,407 7,578 7,661

Fovillea

Pupinb

Saint-Marcc

Lévy-Leboyer/ Camerond 3.2

3 3.5 3.4 3.4 3.4 4 4.8 5.5 6.1

10.4 10.4 10.4 11 11 11 11.2 11.4 11.6

(4.3) (4.4) (4.5) (4.6) (4.7) (4.8) (4.9) 5 (5.1) (5.2) (5.3) (5.4) (5.5) (5.6) (5.7) (5.8) (5.9) 6 (6.2) (6.4) (6.6) (6.8) 7 7.2 7.1 7.2 7.2 7.7 8.1 8.6 9

3.6

4.5

5

5.5

6.9

5.8

8.4

Source: First three columns are from author's computations (see Chapter 4). Foville’estimates. However, only the ﬁgure for 1878 is properly speaking taken from Foville. The ﬁgures for 1870–1877 obtained through Denuc's retropolation (Denuc 1931–2: 426). Pupin's evaluation based on an estimation for 1870, and on the formula G(t)=C(t)-L(t), where L(t) represents the losses (re-melting and losses), computed separately for gold and silver. The ﬁgures reported were computed by Saint-Marc (1974 pp. 24–5) from Denuc (p. 434), and does not include the smaller silver denominations, while she includes them in the Foville's ﬁgures. Saint-Marc's retropolation (prior to 1870) based on assumed linear trend with arbitrary slope. Lévy-Leboyer, in (1977b: 408). As we are concerned with the total stock of metallic currency, we have added the Bank's reserves to the ﬁgures.

241

STATISTICAL ANNEXES

Table B. World bullion production: Hector Hay's series (franc millions, 1849–85, annual data) Year 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867

Gold 320 358 419 921 784 643 682 744 672 629 630 601 574 544 539 570 607 610 576

Source: Journal of Institute of Bankers, 1886.

Silver 232 232 232 232 232 232 232 234 235 234 235 236 247 260 280 292 294 289 306

Year 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885

Gold 552 536 539 539 501 484 457 491 519 529 592 536 478 493 486 416 416 416

Silver 286 263 286 332 351 376 383 428 421 466 497 469 459 474 517 354 436 441

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Table C. Net specie movements, gold and silvera: ofﬁcial statistics (franc millions, annual data) Year 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 a

Gold: net exports 9 13 −38 −6 −17 −85 −17 −289 −416 −218 −375 −446 −488

Silver: net imports 47 53 214 244 73 78 −3 −17 −164 −197 −284 −360 −15

Year 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870

Gold: net exports −539 −311 24 −165 −12 −125 −150 −465 −409 −212 −275 −119

Silver: net imports −171 −157 −62 −86 −68 −42 72 45 189 109 112 35

Gold: exports are marked with a plus sign (+), imports with a minus sign (−); Silver: exports are marked with a minus sign (−), imports a plus sign (+).}

Table D. Gold–silver exchange ratio variations in Paris (units of silver per one unit of gold, annual averages) Year 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 1838 1839 1840

Ratio 15.77 15.72 15.76 15.68 15.62 15.71 15.66 15.7 15.81 15.8 15.75 15.86 15.87 15.71 15.76 15.77 15.76 15.75 15.73 15.69

Year 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860

Ratio 15.71 15.8 15.87 15.83 15.87 15.87 15.83 15.94 15.8 15.8 15.58 15.58 15.54 15.46 15.46 15.47 15.33 15.49 15.34 15.39

Source: Cours authentiques des matières d’or et d’argent, Paris Mint archives.

Year 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880

Ratio 15.47 15.41 15.38 15.38 15.55 15.35 15.51 15.56 15.55 15.35 15.42 15.57 15.80 16.01 16.51 17.69 17.19 17.86 18.34 18.03

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Table E. Gold–silver exchange ratio variations in London (units of silver per one unit of gold, annual averages) Date 1800 1801 1802 1803 1804 1805 1806 1807 1808 1809 1810 1811 1812 1813 1814 1815 1816 1817 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 1831 1832 1833

Ratio 15.68 15.46 15.26 15.41 15.41 15.79 15.52 15.43 16.08 15.96 15.77 15.53 16.11 16.25 15.04 15.26 15.28 15.11 15.35 15.33 15.62 15.95 15.8 15.84 15.82 15.7 15.76 15.74 15.78 15.78 15.82 15.72 15.73 15.93

Source: Warren and Pearson (1935).

Date 1834 1835 1836 1837 1838 1839 1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867

Ratio 15.73 15.8 15.72 15.83 15.85 15.62 15.62 15.7 15.87 15.93 15.85 15.92 15.9 15.8 15.85 15.78 15.7 15.46 15.59 15.33 15.33 15.38 15.38 15.27 15.38 15.19 15.29 15.5 15.35 15.37 15.37 15.44 15.43 15.57

Date 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900

Ratio 15.59 15.6 15.57 15.57 15.63 15.93 16.16 16.64 17.75 17.2 17.92 18.39 18.05 18.25 18.2 18.64 18.61 19.41 20.78 21.1 22 22.1 19.75 20.92 23.72 26.49 32.56 31.6 30.59 34.2 35.03 34.36 33.33

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Table F. Annual mint output, gold and silver, in France (francs, 1796–1878) Year 1796 1797 1798 1799 1800 1801 1802 1803 1804 1805 1806 1807 1808 1809 1810 1811 1812 1813 1814 1815 1816 1817 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 1838 1839

Silver:5 franc 41,399,435 11,917,300 18,979,705 13,852,230 3,816,595 4,842,785 11,429,255 22,827,000 42,303,315 39,181,990 22,428,245 4,022,115 46,911,430 39,927,225 51,722,400 244,737,480 155,228,065 130,014,265 60,788,535 37,660,240 34,193,345 35,044,790 12,099,695 20,944,005 18,061,460 66,775,910 98,441,395 80,340,750 111,572,835 72,869,470 88,732,310 149,580,405 157,130,665 99,645,450 118,696,115 203,292,395 134,305,315 154,425,595 211,534,020 95,811,105 41,518,825 109,202,540 86,240,080 71,538,785

Other silver 0 0 0 0 0 0 0 344,988 5,213,880 7,203,919 2,813,406 986,788 20,922,492 4,369,269 5,447,816 11,661,560 5,558,344 4,886,048 455,586 13,566 724,181 2,098,789 306,381 291,072 375,160 757,956 2,237,742 2,570,930 2,903,172 2,333,821 2,103,313 4,288,573 4,335,468 2,997,167 1,490,974 1,931,369 7,048,600 3,057,268 6,754,284 4,155,044 1,723,574 2,656,157 2,249,244 2,098,957

Gold:20 franc 0 0 0 0 0 0 0 1,165,240 28,327,740 10,406,220 15,494,760 16,788,880 29,659,500 14,402,200 43,736,040 81,411,860 69,435,960 60,741,080 64,544,720 55,379,840 12,802,120 48,577,640 80,857,020 52,226,260 28,561,880 404,140 4,678,740 401,740 6,489,540 43,586,920 923,060 3,156,700 5,945,180 274,580 9,298,160 47,138,860 988,660 7,886,140 17,666,880 3,058,540 2,987,520 897,780 3,699,060 20,669,080

Other gold 0 0 0 0 0 0 0 9,044,600 10,136,240 10,068,280 23,039,000 1,231,040 2,651,760 804,240 2,334,560 50,723,880 28,281,920 1,918,600 0 0 2,349,160 3,619,440 14,553,440 184,400 219,200 0 39,360 6,440 582,160 2,029,440 2,480 4,240 2,080,560 843,600 14,218,480 2,502,520 1,057,600 8,913,640 12,564,320 1,491,520 2,109,520 1,128,960 1,241,080 920

245

STATISTICAL ANNEXES

1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 Total Source: Paris Mint Archives.

61,305,885 73,299,680 65,879,910 71,858,950 66,975,560 83,903,290 42,211,015 71,610,030 119,052,945 203,831,545 80,603,390 57,496,450 69,951,000 19,458,160 53,075 24,305,865 45,777,405 467,030 133,950 16,825 0 110,490 105,645 108,435 160,840 485,670 189,465 54,051,560 93,620,550 58,264,285 53,648,350 4,710,905 389,190 154,649,045 59,996,010 75,000,000 52,661,315 16,464,285 1,815,650 5,060,610,520

2,489,642 4,218,261 2,511,260 2,290,048 2,159,420 6,064,319 5,675,130 6,675,127 678,150 2,717,118 5,855,095 1,830,858 1,967,445 641,328 2,070,812 1,194,440 8,644,809 3,342,581 8,529,618 8,384,988 8,034,198 2,407,559 2,413,752 221,175 7,135,769 8,736,724 44,631,944 59,706,979 35,824,718 9,911,612 15,402,906 19,167,594 26,449,179 1,621,115 613,978 0 0 0 5,770 451,592,279

40,998,240 12,375,060 1,852,720 2,826,600 2,742,260 119,140 2,086,420 7,706,020 39,697,740 27,109,560 79,271,880 251,704,280 13,881,300 312,964,020 469,719,140 367,995,660 374,917,980 383,864,280 377,552,700 523,321,500 318,932,700 80,605,060 154,648,660 153,455,860 207,641,940 120,797,160 279,403,560 148,790,280 282,202,540 227,256,940 54,348,800 50,169,880 0 0 24,319,700 234,912,000 176,493,160 255,181,140 141,801,760 7,098,337,880

0 0 0 0 0 0 0 0 0 0 5,920,510 18,005,290 13,146,970 0 56,809,060 79,432,160 133,364,015 188,696,945 111,136,935 179,376,290 109,519,725 17,611,340 59,593,330 56,774,780 66,201,825 41,089,675 85,679,365 49,789,230 57,874,145 6,929,250 1,046,000 0 0 0 0 0 0 0 43,516,340 1,593,489,780

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Table G. 1878 Monetary Survey: napoléons. Number of coins struck (A) and counted (B), analysis of the Banque de France's Recettes en ville (C), and Belgian survey (D). Year 1803 1804 1805 1806 1807 1808 1809 1810 1811 1812 1813 1814 1815 1816 1817 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 1838 1839 1840 1841 1842

A 58,262 1,416,387 520,311 1,151,950 839,444 1,482,975 720,110 2,186,802 4,070,593 3,471,798 3,037,054 3,227,236 2,768,992 640,106 2,428,882 4,042,851 2,611,313 1,428,094 20,207 233,937 20,087 324,477 2,179,346 46,153 157,835 297,259 13,729 464,908 2,356,943 49,433 394,307 883,344 152,927 149,376 44,889 184,953 1,033,454 2,049,912 618,753 92,636

B 572 347 138 659 571 1,024 566 1,435 2,475 2,424 1,925 2,072 2.104 235 1,608 2,296 1,430 737 72 224 79 1,574 411 76 223 347 52 484 2,055 470 317 683 153 182 103 255 917 2,409 764 149

C 14 9 0 12 15 27 20 39 67 61 61 53 51 4 39 75 52 13 0 5 0 35 8 2 5 11 0 12 46 0 4 20 0 3 0 5 18 76 27 2

D 6 4 3 20 16 23 15 37 70 72 55 43 49 2 40 60 25 14 0 7 2 37 10 4 0 15 7 28 43 15 30 30 18 8 12 17 33 74 28 11

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STATISTICAL ANNEXES

1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 Total

141,330 137,113 5,957 104,321 385,301 1,984,887 1,355,478 3,963,594 12,585,214 694,065 15,648,201 23,485,957 18,399,783 18,745,899 19,193,214 18,877,635 26,166,075 15,946,635 4,030,253 7,732,433 7,672,793 10,382,097 6,039,858 13,970,178 7,439,514 14,110,127 11,362,847 2,717,440 2,508,494 0 0 1,215,985 11,745,600 8,824,658 12,759,057 7,090,088 355,294,106

139 303 109 116 449 3,722 3,175 6,791 19,280 18,280 11,175 38,866 31,465 28,928 35,007 31,531 45,353 27,775 7,051 14,957 16,719 18,139 16,794 22,182 18,062 26,137 19,631 5,240 1,551 0 0 640 5,049 21,852 20,242 20,618 571,945

3 3 1 4 10 83 83 166 565 480 342 1,054 861 795 990 862 1,281 656 186 420 474 503 444 662 617 742 575 169 68 0 0 23 299 1,715 1,291 2,959 20,277

13 21 16 6 15 95 116 177 491 436 256 945 742 670 805 809 1,127 753 164 477 480 525 540 624 594 759 530 168 51 0 0 34 164 731 631 470 15,418

Sources: Data in the ﬁrst two columns are taken from Foville (1886). The third column is the result of an analysis of the payments made to the Banque de France on 14 August 1878 (Banque de France archives, B 80.1, Enquêtes monétaires). The fourth column is derived from Malou (1880).

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Table H. 1878 Monetary Survey: écus. Number of coins struck (A) and counted (B), analysis of the Banque de France's Recettes en ville (C), and Belgian survey (D) Year 1796 1797 1798 1799 1800 1801 1802 1803 1804 1805 1806 1807 1808 1809 1810 1811 1812 1813 1814 1815 1816 1817 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 1838

(An (An (An (An (An (An (An (An (An (An

IV and V) VI) VII) VIII) IX) X) XI) XII) XIII) XIV)

A 8,279,887 2,383,460 3,795,941 2,770,446 763,319 968,557 2,285,851 4,565,400 8,460,663 7,836,398 4,485,649 804,423 9,382,286 7,985,445 10,344,480 48,947,496 31,045,613 26,002,853 12,157,707 7,532,048 6,838,669 7,008,958 2,419,939 4,188,801 3,612,292 13,355,182 19,688,279 16,068,150 22,314,567 14,573,894 17,746,462 29,916,081 31,426,133 19,929,090 23,739,223 40,658,479 26,861,063 30,885,119 42,306,804 19,162,221 8,303,765 21,840,508 17,248,016

B 927 648 772 817 647 442 668 1,013 1,175 662 684 1,128 2,179 1,877 2,120 8,556 5,909 4,541 2,487 1,588 1,489 1,495 560 837 871 2,584 3,621 3,165 5,867 2,170 6,707 10,741 11,117 7,480 15,019 42,142 26,233 33,204 42,856 18,102 9,475 22,107 18,606

C 19 10 14 29 12 5 25 16 17 0 7 4 13 16 22 106 69 54 29 18 12 19 2 5 11 48 44 37 75 37 69 146 157 90 166 540 360 496 553 267 131 350 224

D 27 19 20 17 23 17 16 21 27 15 35 29 78 96 108 447 284 227 115 64 57 62 23 36 37 109 178 148 305 132 314 571 563 371 871 3,203 2,136 2,922 3,314 1,315 676 1,774 1,429

249

STATISTICAL ANNEXES

1839 1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 Total Source: See Table G.

14,307,757 12,261,177 14,659,936 13,175,982 14,371,790 13,395,112 16,780,658 8,442,203 14,322,006 23,810,589 40,766,309 16,120,678 11,499,290 13,990,200 3,891,632 10,615 4,861,173 9,155,481 93,406 26,790 3,365 0 22,098 21,129 21,687 32,168 97,134 37,893 10,810,312 18,724,110 11,652,857 10,729,670 942,181 77,838 30,929,809 11,999,202 15,000,000 10,532,263 3,292,857 363,130 1,012,122,104

14,643 12,928 15,797 12,812 14,057 13,384 15,069 9,347 14,133 23,204 33,155 13,886 11,848 13,902 1,260 902 3,732 5,435 1,320 1,099 1,461 0 1,648 893 798 599 780 1,369 33,399 55,537 33,128 34,186 4,115 2,387 31,544 27,603 18,692 12,807 6,287 566 824,998

207 171 231 174 206 202 206 102 201 290 430 174 150 141 2 0 64 61 0 0 5 0 0 1 0 0 0 0 586 863 565 515 22 50 340 283 167 274 198 3 11,208

1,241 976 1,399 1,106 1,322 1,383 1,424 701 1,087 1,566 2,735 1,216 854 868 69 22 294 409 35 26 52 0 7 27 47 9 16 56 1,924 3,970 2,203 2,541 157 48 689 239 194 77 34 2 53,256

250

STATISTICAL ANNEXES

Table I. 1878 Monetary Survey: 10-franc coins Year 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859

Number of coins Struck 592,051 1,800,529 1,314,697 0 3,899,802 6,149,585 10,777,734 14,498,136 8,211,046 13,325,889

Year Counted 2,361 9,751 768 0 1858 16,495 28,906 43,392 27,940 42,478

Number of coins 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869

Struck 8,075,555 1,029,214 4,712,118 4,251,637 4,788,520 3,249,295 6,495,917 3,550,274 4,532,811 109,351

Counted 27,763 1,295 17,343 15,814 20,706 12,803 21,808 13,215 15,672 1,381

Source: Foville (1886).

Table J. Mean age of gold and silver coins (average number of years during which the coins had circulated) Year 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859

Gold 27.8 28.0 26.3 20.7 21.3 19.1 14.3 12.2 10.8 9.7 9.3 8.6

Source: Author's computations, Appendix D.

Silver 13.0 12.7 13.2 13.9 14.5 14.9 16.1 17.2 18.3 20.2 21.2 22.8

Year 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870

Gold 8.8 9.6 10.2 10.7 11.1 11.8 12.0 12.6 12.9 13.4 14.3

Silver 24.5 25.8 27.4 28.9 30.2 31.3 32.3 31.5 29.7 29.2 28.8

251

STATISTICAL ANNEXES

Table K. Wear on gold coins: Average weight of coins from a given ‘vintage’ compared with straight weight (1000) ‘Vintage’ Consulate/Empire Louis XVIII Charles X Louis-Phil. 1848 1849 1850 1851 1852 1853 1854 1855 1856 Source: Malou (1880).

Average weight 994.2 994.3 993.7 995.1 996.9 995.7 997.5 997 997.2 996.8 997.2 997.4 997.6

‘Vintage’ 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868

Average weight 997.4 997.9 998 998.2 998.7 998.8 998.9 999.1 999.5 999.4 999.9 999.9

252

STATISTICAL ANNEXES

Table L. Quoted end-of-month price of gold in Paris (‰ of premium [+] or discount [−] compared with reference Tariff)a Month January February March April May June July August September October November December Month January February March April May June July August September October November December Month January February March April May June July August September October November December a

1846 10.5 10.5 10.5 10.5 16.5 16.5 16.5 16.5 16.5

1847 10.5 9 10 15 17 15 10 7.5 8

1848 11.5 11 65 30 16.5 19 19 11.5 9.5

1849 10.5 2.25 3.5 8.25 10.5 10.25 9.5 9.5 9.5

1850 11.75 14.5 14.75 14.75 16.5 10.25 18.5 8.5 8.5

1851 0 0 −2 −2 −2 −2 −2 −3 −3

1852 0.75 0.75 0.75 4.25 5.5 4 1.5 1 2.5

1853 0.75 0.25 0.25 0.25 0.25 0 0 −3.5 −3.5

1854 −2 −2.5 −2.5 −4 −3.75 −3.5 −3.5 −3 −3

1855 −3 −3 −3 −3 −3 −3 −3 −3 −3

1856 5 5 6 6 6 6 6 6 6.5

1857 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5

16 18

18 13

14.5 17.5

10.75 11.5

4.75 1

−3 0.75

4 0.75

−3.75 −2.75

−3 −3

5 5

6.5 6.5

6.5 6.5

17

12.5

9

12.25

0

0.75

0.75

−2

−3

5

6.5

6.5

1858 0 0 0 0 0 0 0 0 0

1859 0 0 0 0 0 0 0 0 0

1860 0 0 0 0 0 −1 −1 −1 −1

1861 1 3 3 2.5 1.75 3.5 3.25 3.5 3.5

1862 2.5 2.5 0.5 2.75 1.75 0.5 0.5 0.5 0.5

1863 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.75 1.75

1864 4 4 4 4 4 4 2.5 2.5 2.5

1865 3.5 3.5 3.5 3.5 3.5 3.5 1.25 1.25 1.25

1866 1 1 1 1 1 1 0 0 0

1867 1 1 1 1 1 0.5 0.5 0.5 0.5

1868 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0

1869 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 1

0 0

0 0

3 0

2.5 2.5

0.75 0.5

1.75 2.5

3.5 3.5

1.25 1.25

0 0

0.5 0.5

0 0

1 1

0

0

0

2.5

1.25

4.5

3.5

1.25

1

0.5

0

1

1870 1.25 1.25 0.75 1.25 1.25 1.25 0.75 0.75 0.75

1871 n.a. 6 2 2 2 1.5 2.5 3.5 3.5

1872 14.5 7.5 4.5 4.5 3 7.5 13 13 13

1873 12.5 10.5 10.5 10.5 10.5 11.5 11.5 11.5 9.5

1874 10 10 5 5 5 0 0 0 0

1875 0 0 0 0 0 0 0 0 0

1876 0 0 0 0 0 0 0 0 0

1877 0 0 0 0 0 0 0 0 0

1878 0 0 0 0 0 0 0 0 0

1879 0 0 0 0 0 0.5 2.5 4.5 4.75

n.a. n.a.

21 15

16 14

8 10

0 0

0 0

0 0

0 0

2.5 1.5

2.75 4

n.a.

15

11.5

10.5

0

0

0

0

2

3.5

Namely 3,437.77 francs for a kilogram of 9/10ths ﬁne gold until February 1854 included, 3,437 thereafter. Source: Cours Authentiques des matières d’or et d’argent, Paris Mint Archives.

253

STATISTICAL ANNEXES

Table M. Quoted end-of-month price of silver in Paris (‰ of premium [+] or discount [−] compared with reference Tariff)a Month January February March April May June July August September October November December Month January February March April May June July August September October November December Month

1846 1.75

1847 3.5

1848 3

1849 2.25

1850 2

1851 4.25

1852 9.55

1853 5.5

1854 11.25

1855 13

1856 20

1857 29

1.75

2.5

2.5

2

2.25

4.25

9.55

9.75

11.75

13

20

29

1.75 1.75 1.75 1.75 1.75 1.75 1.75

2.5 3.5 2.75 3.5 2.5 2.5 2.25

2.25 2.25 2.25 2.25 2.25 2.25 2.25

2 2 1.5 1.5 1.5 2 2

2.25 2.25 2.25 3.25 3.25 3.25 3.25

6.25 6.25 6.25 6.25 6.25 6.25 6.25

9.55 10.25 9.5 9.5 10 10 9.75

10.5 10.5 10.5 5 5 10.5 9

15 12 14 14 14 13 13

13 13 13 13 13 13 13

20 20 20 19 19 19 25

29 29 32.5 32.5 32.5 32.5 32.5

3.5

2.5

2.5

2

3.25

6.25

12

5.75

13

17

24.5

32.5

3.5

2.5

2.5

2

8.25

9.05

12

13

13

17

24.5

32.5

3.5

2.75

2.75

2

8.25

9.05

9

13

13

20

24.5

27.5

1858 19

1859 24

1860 24

1861 21.25

1862 21

1863 26

1864 35

1865 13.5

1866 22

1867 16.5

1868 9.5

1869 10

19

24

25

20

21

26

31

13.5

20

16.5

9.5

10

19 15 15 15 15 10 10

24 24 24 24 24 24 24

25 25 25 15 15 15 15

20 19.5 19.5 16 14 13 13

21 17.5 19.5 19.5 19.5 19.5 17.5

26 18 18 23.5 18.5 18.5 22

31 31 31 31 16.5 16.5 16.5

13.5 13.5 13.5 13.5 11 11 11

20 20 20 20 27.5 27.5 27.5

16.5 16.5 16.5 11.5 11.5 11.5 11.5

9.5 9.5 9.5 9.5 9.5 9.5 8.5

10 10 10 10 10 10 8.5

10

24

21.25

18

17.5

22

13.5

11

27.5

9.5

8.5

8.5

10

24

21.25

17.5

22.5

24

13.5

11

27.5

9.5

8.5

10.5

10

24

21.25

17.5

26

25.5

13.5

11

17.5

9.5

8.5

10

1870

1871

1872

1873

1874

1875

1876

1877

1878

1879

254

a

STATISTICAL ANNEXES

Janu- 11.5 ary Febru- 11.5 ary March 10.5

n.a.

31

14.5

−12

−40

−70

−35

−100

n.a.

28

10

−12

−40

−95

−65

−100

n.a.

13.5

10

−7

−40

−100

April

10.5

n.a.

13.5

10

−7

−38

−112.- −95 5 −105 −85

−99

May

9.5

n.a.

11

10

−7

−40

−125

−105

June

9.5

16

13.5

8.5

−19

−55

−155

July

14.5

14.5

16

8.5

−19

−77.5

−160

−102.5 −107.5 −100

August 6.75

19

16.75

8.5

−19

−65

−130

−100

September October November December

6.75

19

22.5

−4.5

−19

−62

−135

−82.5

n.a.

41

22.5

−13

−19

−51

−115

−87.5

n.a.

36

17.5

−12

−19

−49.5

−97.5

−87.5

n.a.

36

13.5

−12

−37.5

−53

−55

−100

−112.5 −127.5 −127.5 −132.5 −160

−167.5 −162.5 −167 −167.5 −165 −137.5 −130 −132.5 −135

−124.5 −147.- −111 5

−167.- −122.5 5

Namely 218.99 francs for a kilogram of 9/10ths ﬁne silver for the whole period. Source: Cours Authentiques des matières d’or et d’argent, Paris Mint Archives.

255

STATISTICAL ANNEXES

Table N. Quoted price of silver in London, pence per standard ounce (37/40ths ﬁne, Wolowski's series completed, annual averages) Month January February March April May June July August September October November December Month January February March April May June

1846

1847

1848

59.31- 60.12- 59.1225 5 5 59.25 60.37- 59.315 25 59.25 60.37- 59.185 75 59.12- 60.25 58.125 5 59 59 59.625 59 59.06- 59.5 25 59.06- 59.25 59.5 25 59.12- 59.93- 59.815 75 25 59.12- 59.75 59.75 5 59.25

1849

1850

1851

59.62- 59.62- 61.625 5 5 59.75 59.62- 61.565 25 60 59.62- 61.5 5 59.87- 59.62- 61.5 5 5 59.87- 59.62- 61.125 5 5 59.62- 59.62- 60.125 5 5 59.62- 59.75 60.75 5 59.81- 59.93- 60.8725 75 5 59.68- 60 60.5675 25

59.25

1852

1853

1854

1855

1856

60.75

61.375 61.3125 61.375 61.375 61.1875 61

61.75

61.5

61.25

1857

62.0625 60.5 61.68- 61.56- 61.31- 61.8775 25 25 5 60.3761.81- 61.37- 60.93- 61.75 5 25 5 75 60.1261.81- 60.75 61 61.75 5 25 59.8761.75 61.12- 61.12- 61.5 5 5 5 59.9361.37- 61.5 61.12- 61.8175 5 5 25 60.31- 61.43- 61.37- 61.5 61.25 61.6825 75 5 75 60.37- 61.62- 61.25 61.5 61.7 61.875 5 5 60.37- 62 61.37- 61.68- 61.87- 61.565 5 75 5 25

61.5625 61.1875 61.5 61.5 61.375 60.9375 60.8125

60.87- 61.25 5 60.37- 61.56- 62.25 5 25

61.37- 62 5 61.37- 61.18- 62.25 5 75

60.12- 59.12- 59.5 5 5

59.5

61.5

60.75

61.43- 61.75 75

61.56- 61.37- 62.12- 61.81- 61.6225 5 5 25 5

1859

1862

1863

1864

1865

1867

1861

61.87- 62.12- 61.315 5 25 61.75 62.06- 61.1825 75 61.81- 62.12- 61.8725 5 5 62.12- 61.68- 61.065 75 25 62.37- 61.62- 61.125 5 5 62.06- 61.25 60.5625 25

61.4375 61.5625 61.3125 61.1875 61.25

61.68- 61.93- 61.5 75 75 61.5 61.5 61.4375 61.5 61.5 61.1875 61.12- 61.25 60.685 75 61.31- 61 60.6825 75 61.31- 61.43- 61.25 60.5625 75 25

1866 61.5625 61.125 60.9375 60.25

61.25

61.4375 61.75

59.81- 59.37- 60.25 25 5 59.93- 59.12- 59.56- 59.5 60.75 75 5 25

1860

60.25

1858

1868

1869

60.87- 60.37- 60.685 5 75 60.75 60.43- 60.8175 25 60.62- 60.68- 60.565 75 25 60.87- 60.68- 60.565 75 25 61.56- 60.62- 60.5 60.25 25 5 61.62- 60.5 60.37- 60.185 5 75

61.81- 61.25 25 61.68- 61.6875 75

1870 60.625 60.4375 60.4375 60.4375 60.5 60.5

256 July

STATISTICAL ANNEXES

62.31- 61.06- 60.1825 25 75 62 61.18- 60.3175 25 61.75 61.62- 60.565 25

August September Octo- 62 ber 62 November 62 December

61

61.06- 61.18- 60.6225 75 5 61.18- 61 61.31- 60.6875 25 75 61.31- 61.12- 61.5 60.8125 5 25

61.68- 60.75 61.5 75 61.56- 60.93- 62 25 75

61.31- 61 25 61.43- 60.9375 71

61.43- 60.5 75 60.75 60.375 61 60.375

61.06- 61 25 61.38- 60.9375 75

60.375 60.4375

60.375 60.3125 60.1875

60.25

61.5

60.31- 60.4325 75 60.5 60.375

60.06- 60.37- 60.5625 5 25 60.43- 60.5 60.5675 25

61.43- 61.12- 61.68- 61.43- 61.56- 61.56- 60.87- 60.37- 60.68- 60.5 75 5 75 75 25 25 5 5 75

60.5

257

STATISTICAL ANNEXES

Table O. Quoted price of silver in London, pence per standard ounce (37/40ths ﬁne, Wetenhall's series completed by The Economist, end-of-month ﬁgures) Month January February March April May June July August September October November December Month January February March April May June July August September October November December

1859 62 61.75

1860 62.125 62.125

1861 61.25 61.125

1862 61.5 61.5

1863 61.625 61.5

1864 61.875 61.375

1865 61.375 61.25

1866 61.5 61

1867 60.875 60.75

1868 1869 60.4375 60.8125 60.4375 60.75

62.375 61.875 61 62 62.625 61.75 61.75

61.875 61.75 61.625 61.75 61.5 61.5 61.625

60.625 61.625 60.75 60.375 60.25 60.25 60.75

61 61.125 61.625 61 61.125 61.375 61.25

61.375 61 61.625 61.25 61 61.125 61.375

61.625 61.25 61 61.125 61.25 61.25 61.375

60.625 60.75 60.625 60.375 60.5 60.625 61

61 61 61.875 61.625 60.5 60.625 60.875

61 60.75 60.375 60.5 60.5 60.375 60.3125

60.5 60.5 60.375 60.375 60.375 60.125 60.375

60.5 60.5 60 60.25 60.25 60.375 60.4375

61.875 62

61.75 61.25

60.75 61.25

61.875 61.875

61.625 61.125

60.625 61.5

61.1875 61 61.375 60.875

60.4375 60.5 60.4375 60.375

60.375 60.4375

62

61.375

61.125

61.5

61.5

61.625

61.875

60.75

60.375

60.75

60.5

1870 1871 1872 60.5625 60.5625 60.875 60.4375 60.5 60.75

1873 1874 59.9375 59.25 59.8125 58.375

1875 57.5 57.375

1876 54.875 53.5

1877 58 56

1878 53.625 54.875

1879 50 49.5

60.4375 60.4375 60.4375 60.5625 61.875 60.375 60.375

59.75 59.75 59.4375 59.3125 59.375 58.8125 59.125

59 59.25 58.5625 59 58.25 58 57.625

57.125 57 56.5 55.8125 56 56.75 56.6875

53.25 53.5 52.125 51 51 52 52.5625

54 54.125 54 53.5 54.25 54.25 55

54.625 53.9375 53.3125 52.625 52.6875 52.125 51.625

50.125 50 51.5 51.6875 51.375 51.5 51.5625

60.5625 60.6875 60 60.4375 60.8125 59.25

58.375 58

57.8125 57.25 53.625 58.125 56.6875 54.5

55 54

49.75 53.5625 50.6875 53

60.5625 60.5

58.0625 57.5

54

49.625

60.1875 60.1875 60.25 60.5625 60.6875 60.6875 60.5

60.75 60.3125 60.0625 60.125 60.125 60.3125 60.4375

59.75

56.125

56.75

52.375

258

STATISTICAL ANNEXES

Table P. Exchange rates between London and Paris (price in London of a three-day bill on Parisa) Month January February March April May June July August September October November December Month January February March April May June July August September October November December a

1846 25.6 25.65

1847 25.3 25.3

1848 25.5 25.35

1849 25.35 25.2

1850 25.4 25.425

1851 24.95 25.025

1852 25.2 25.325

1853 25.05 25.025

1854 24.975 24.95

1855 25.05 25.075

1856 25.25 25.4

1857 25.15 25.2

1858 25.1 25.025

25.7 25.725 25.725 25.65 25.775 25.7 25.75

25.35 25.7 25.55 25.525 25.35 25.3 25.45

25.5 25.35 25.45 25.5 25.35 25.3 25.325

25.25 25.325 25.45 25.375 25.35 25.4 25.475

25.55 25.525 25.5 25.45 25.3 25.325 25.275

24.975 25 25 24.975 25 25.05 25.2

25.325 25.4 25.4 25.25 25.275 25.25 25.25

25.025 25.025 25.05 25 24.975 24.95 25.075

24.925 24.9 24.975 24.975 24.975 25 25.075

25.125 25.175 25.15 25.075 25.025 25.075 25.3

25.375 25.375 25.375 25.275 25.275 25.275 25.1

25.225 25.25 25.25 25.225 25.2 25.175 25.175

25.05 25.025 25.025 25 25.05 25.1 25.125

25.65

25.7

25.45

25.45

25.15

25.25

25.15

25

25.075

25.35

25.25

25.25

25.05

25.525

25.6

25.4

25.475

25

25.1

25.175

25

25.075

25.25

25.2

25.4

25.075

25.45

25.55

25.275

25.45

24.875

25.2

24.975

24.975

25

25.25

25.2

25.2

25.1

1859 25.075 25.075

1860 25.025 25.05

1861 25.175 25.35

1862 25.125 25.1

1863 25.225 25.15

1864 25.225 25.25

1865 25.125 25.125

1866 25.125 25.225

1867 25.1 25.125

1868 25.1 25.1

1869 25.125 25.125

1870 25.175 25.15

25.025 25 25.05 25.075 25.025 25.075 25.1

25.075 25.125 25.125 25.1 25.1 25.125 25.1

25.35 25.175 25.3 25.3 25.35 25.4 25.375

25.25 25.225 25.2 25.225 25.175 25.175 25.15

25.175 25.175 25.175 25.2 25.25 25.25 25.225

25.15 25.2 25.225 25.15 25.2 25.25 25.275

25.175 25.15 25.15 25.175 25.125 25.175 25.2

25.225 25.1 25.05 25.1 25.1 25.25 25.2

25.15 25.1 25.15 25.15 25.125 25.175 25.175

25.15 25.125 25.15 25.175 25.125 25.2 25.2

25.125 25.15 25.275 25.15 25.15 25.15 25.125

25.2 25.15 25.175 25.175 25.1 25 25.25

25.075

25.125

25.3

25.15

25.2

25.25

25.2

25.125

25.125

25.1

25.125

n.a.

25.075

25.15

25.225

25.125

25.25

25.175

25.1

25.15

25.1

25.125

25.125

n.a.

25.05

25.125

25.275

25.125

25.25

25.125

25.1

25.175

25.125

25.15

25.15

n.a.

End-of-month ﬁgures. Source: The Economist.

259

STATISTICAL ANNEXES

Table Q. Trends in the Banque de France's gold and silver reserves in Paris and the provinces 1852–78 (franc millions) 1852 January February March April May June July August September October November December 1853 January February March April May June July August September October November December 1854 January February March April May June July August September October November December 1855 January

Paris: Gold

Paris: Silver

Branches: Gold

Branches: Silver

88 87 87 82 77 73 70 60 70 67 66 65

370 375 390 400 413 432 427 438 438 427 398 357

2 1 1 2 2 3 5 3 3 3 3 3

102 109 117 116 104 113 97 98 97 88 81 84

76 93 97 111 120 121 104 122 114 99 94 94

321 299 294 286 284 284 268 251 232 177 145 121

3 5 6 5 7 7 6 8 9 10 8 8

81 80 87 94 100 120 98 97 96 93 83 92

102 84 83 131 157 178 173 189 215 216 198 172

99 94 95 90 91 100 103 107 112 109 88 74

9 12 14 9 14 23 16 15 11 19 22 29

84 89 98 136 146 165 158 162 157 132 127 118

147

66

29

119

260 February March April May June July August September October November December 1856 January February March April May June July August September October November December 1857 January February March April May June July August September October November December 1858 January February March April May

STATISTICAL ANNEXES

162 169 149 125 83 37 60 69 73 81 46

68 71 75 77 86 79 92 67 38 23 39

33 28 23 23 31 30 36 23 31 23 25

160 170 184 193 196 167 149 127 89 82 106

33 52 47 56 66 71 69 92 83 52 52 60

47 42 43 48 51 45 19 32 30 25 25 26

18 16 22 26 29 36 24 25 29 15 24 34

99 102 100 136 139 133 118 97 93 75 61 78

45 56 78 76 62 77 76 82 92 80 48 53

26 26 28 29 32 34 33 28 27 26 25 28

34 28 26 30 36 60 52 50 39 34 36 56

84 83 88 98 101 112 99 84 88 84 79 97

42 54 94 128 167

28 29 28 30 32

72 69 74 70 70

107 129 140 153 171

261

STATISTICAL ANNEXES

June July August September October November December 1859 January February March April May June July August September October November December 1860 January February March April May June July August September October November December 1861 January February March April May June July August September

194 195 220 236 202 187 198

34 36 44 51 51 52 53

87 94 90 79 68 64 95

194 200 206 227 227 221 206

163 155 174 155 103 99 146 213 218 163 149 137

61 68 79 73 71 67 63 61 61 61 62 67

66 69 81 78 105 152 98 102 108 103 97 112

234 229 222 237 237 251 251 251 257 264 265 261

103 93 97 96 86 93 58 80 68 37 35 50

79 79 79 81 80 79 82 82 81 79 79 73

106 126 129 121 118 139 133 143 137 104 83 97

243 240 238 235 236 238 239 242 243 238 236 210

30 55 58 57 80 66 57 76 72

45 36 32 16 31 33 25 13 16

81 109 124 126 128 157 155 206 221

192 180 180 177 152 155 144 99 74

262 October November December 1862 January February March April May June July August September October November December 1863 January February March April May June July August September October November December 1864 January February March April May June July August September October November December 1865

STATISTICAL ANNEXES

65 57 66

14 21 28

164 147 161

60 57 68

55 80 111 94 93 71 42 50 30 29 36 83

23 30 38 41 44 49 52 57 61 63 49 32

149 169 182 188 189 205 204 189 187 152 125 128

72 78 87 90 86 84 83 87 88 86 77 76

44 66 84 81 87 49 38 44 30 47 43 41

26 24 25 28 30 27 27 20 12 17 18 20

107 123 241 164 180 172 139 140 166 132 89 90

77 80 87 92 96 99 100 96 61 48 54 53

27 24 38 63 74 79 72 69 67 54 65 85

17 14 14 13 13 13 13 13 13 14 16 17

64 81 88 85 107 132 116 126 129 118 130 175

49 47 53 52 54 61 64 65 69 62 68 74

263

STATISTICAL ANNEXES

January February March April May June July August September October November December 1866 January February March April May June July August September October November December 1867 January February March April May June July August September October November December 1868 January February March April

73 97 124 113 127 138 149 143 153 119 114 137

18 19 51 24 27 33 35 40 49 47 43 40

142 153 183 200 219 217 215 208 205 173 156 172

77 81 85 89 90 92 96 95 96 91 85 84

131 150 169 176 192 287 355 412 395 356 339 348

37 37 40 41 44 29 18 22 24 27 33 39

148 166 194 216 213 230 226 233 242 214 182 223

73 64 69 71 63 65 63 62 70 75 77 90

313 333 357 353 375 412 418 460 500 451 490 510

43 47 50 54 60 68 74 85 100 115 131 145

197 221 237 245 236 250 231 228 227 189 174 194

97 104 110 118 124 130 134 240 146 147 149 155

510 568 595 582

159 181 202 205

167 176 184 170

159 164 169 166

264 May June July August September October November December 1869 January February March April May June July August September October November December 1870 January February March April May June July August September October November December 1871 January February March April May June July August

STATISTICAL ANNEXES

590 618 601 670 675 601 531 493

214 223 233 241 252 261 269 278

179 175 183 188 179 172 168 175

175 184 183 189 191 193 198 196

443 452 483 478 497 477 431 439 456 439 427 432

281 289 291 311 329 352 363 369 381 393 400 401

150 165 182 199 212 232 230 241 230 226 219 258

191 193 196 183 178 159 159 162 163 165 164 163

387 382 388 375 353 368 321 285 285 279 277 274

402 410 414 417 418 418 414 217 98 71 63 58

251 274 314 349 343 363 344 332 315 242 187 163

156 152 155 158 156 159 161 91 59 25 17 14

273 271 251 255 255 255 276 288

50 37 39 47 52 58 26 20

141 122 118 133 142 152 262 288

11 12 25 35 32 41 99 74

265

STATISTICAL ANNEXES

September October November December 1872 January February March April May June July August September October November December 1873 January February March April May June July August September October November December 1874 January February March April May June July August September October November December

201 205 205 206

21 21 24 21

322 341 344 348

61 60 59 59

205 250 251 251 253 255 256 258 259 258 258 258

18 24 35 45 48 48 46 44 45 44 43 40

367 310 312 319 328 338 346 379 384 390 395 399

60 63 63 82 87 90 92 99 91 93 93 94

258 258 262 267 269 219 175 136 158 162 165 170

35 32 33 34 40 37 39 53 46 47 53 63

401 404 408 412 417 422 427 433 417 422 425 434

95 94 95 94 87 87 93 93 87 88 87 73

177 203 213 234 271 298 351 397 397 406 437 482

111 161 213 222 225 230 228 229 232 230 228 234

443 457 482 512 524 544 551 552 544 543 533 527

65 62 80 86 81 86 94 94 94 88 83 72

266 1875 January February March April May June July August September October November December 1876 January February March April May June July August September October November December 1877 January February March April May June July August September October November December 1878 January February March

STATISTICAL ANNEXES

498 621 641 643 632 649 620 608 612 597 589 615

231 234 239 249 266 274 281 289 316 325 339 353

511 518 523 514 520 522 516 522 543 537 536 532

79 91 102 111 120 124 125 146 148 141 138 139

663 703 763 806 867 904 937 965 969 968 1017 1019

364 371 389 399 411 426 429 434 445 464 479 488

524 539 547 550 552 552 548 545 535 527 521 521

136 137 142 141 147 150 152 152 154 146 141 145

1005 1059 1039 1029 1037 1094 1054 1044 1063 1034 1018 992

513 522 546 562 582 603 589 594 585 582 584 583

503 495 466 438 410 373 337 326 304 273 239 218

149 153 159 171 186 202 235 245 257 263 269 278

939 907 909

582 583 583

186 190 179

280 291 303

267

STATISTICAL ANNEXES

April May June July August September October November December

902 923 937 964 969 959 875 843 824

584 584 586 585 587 588 599 612 622

181 202 204 209 207 191 176 183 202

Source: Banque de Franche archives, Composition de l’Encaisse et Statistique Journalière.

327 352 378 395 407 419 416 423 430

268

STATISTICAL ANNEXES

Table R. Marc banco per pound sterling, monthly series, end of month Month January February March April May June July August September October November December Month January February March April May June July August September October November December

1848 11.5 11.25

1849 9.75 9.75

1850 10.25 11.25

1851 3.75 4.75

1852 7 7.75

1853 3.25 5

1854 1.25 2

1855 3.5 4.25

1856 5.75 7

1857 2 4

1858 4 3.75

10.75 7 9.5 9.5 9.25 7.25 8.25

9.75 9.75 11.25 11 10.75 10.75 12

10.75 10.25 9.75 8.5 9 8.5 7.5

5 4.5 5 4 5 5.5 7.5

7.75 7.75 8.5 7.5 5.75 6.25 6.25

5.5 4.75 5 4 2.75 2.5 2

1 1.25 3.25 2.25 4.25 3.25 3.25

4.75 6.25 3 4.5 2.75 3.5 4.25

6.75 6 6 4.5 3.75 2.75 1.75

2 2.25 4 3 3.5 2.75 4

3.75 4.625 5.5 4.875 5.5 7.5 6.75

9.75

11.5

7

7.25

5.5

2.5

3

4

2.5

4.75

5.25

10.5

11.25

3.5

4

4.25

1

2.5

5.25

2.5

8

4.25

10.5

9.75

1.5

5.75

3.25

1

3.5

5.25

0.25

3.25

3.75

1859 3.25 3.75

1860 2.25 3

1861 5.25 3.375

1862 6.5 6

1863 3.875 4

1864 4.25 4

1865 4.5 5.75

1866 6.5 7.5

1867 6.75 7

1868 8 8.25

1869 8 8.25

1.75 1.75 0.5 1 2 3.5 3.5

3.5 2.75 2.75 2.5 4 3.25 3

6.5 4.75 6.25 4.375 7.75 7.75 5.5

6.5 6.25 6.25 5 5 4.75 5.5

4 4 4 3.75 6.75 6 6.75

2.5 5.75 3.5 5.5 6 5.5 5.5

6 6.75 5.25 9.125 7.5 7.5 7.25

6.5 6.5 3.5 3.75 5.5 6.75 6.75

7.5 6.5 8.5 7.75 7.75 8.5 8.375

8 8.25 8 8.5 8.5 8.94 9.25

8.5 9 10 9.5 9 9.25 7.125

2.75

4.5

8.5

5.5

6.75

2.5

6.5

5.5

8.75

9.5

8

3.5

3.75

6

5.5

5

5.5

6

6.5

7.75

9.5

7.5

3.5

4

5.5

2.75

5

5.5

6.5

6.5

8

8.5

8

Source: The Economist. Sight bills. Exchange rates were recorded as fractions (n/16ths) of the premium that had to be paid on top of the price of 13 marcs per pound. For a 15.5 gold–silver ratio, the exchange rate would stand at a 7.5 premium over 13, meaning 13.46875. The formula to transform the quote we report here in terms of fractional exchange rate is x = 13 + y/16, where y is the premium recorded in Table R. For details on these matters, refer to Seyd (1868).

269

STATISTICAL ANNEXES

Table S. Annual average short term discount rates in various European ﬁnancial centres Year 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880

Italy

France

Belgium

Switzerland

6.1 5.06 5.71 7.87 5.42 6.08 5.29 5 5 5.08 5 5 5 5 5 5 5 4.75 4.5 4.5

4 3.17 3.24 4.31 4.44 5.51 6.26 3.7 3.46 3.63 5.53 3.77 4.64 6.51 3.72 3.67 2.71 2.5 2.5 3.99 5.71 5.16 5.15 4.3 4 3.4 2.26 2.21 2.58 2.84

4 3.4 2.97 3 3 3.26 4 3.19 3.18 3.23 3.8 3.18 3.57 5.55 4.08 4.34 2.96 2.5 2.5 3.38 4.08 3.77 5.06 4.38 3.81 2.7 2.65 3.16 3 3.3

3 3 3.56 4 4.35 4.62 5.5 4.12 3.67 4.5 5.56 4.41 5.03 6.26 4.47 4.71 3.41 3.33 2.97 4 3.83 4.64 5.27 4.32 3.97 3.33 3.26 3.47 3.21 2.98

Source: Data compiled by the author from a variety of sources.

United Kingdom 3 2.16 3.69 5.12 4.89 6.08 6.67 3.23 2.74 4.18 5.25 2.53 4.41 7.33 4.77 6.95 2.54 2.1 3.2 3.09 2.88 4.1 4.97 3.69 3.23 2.61 2.9 3.78 2.51 2.76

Germany 4 4 4.25 4.36 4.08 4.93 5.75 4.3 4.2 4 4 4 4.08 5.31 4.96 6.21 4 4 4.24 4.91 4.16 4.29 4.96 4.35 4.72 4.16 4.42 4.34 3.7 4.24

270

STATISTICAL ANNEXES

Table T. Bank of France discount rate (‘taux d'excompte’) end-of-month data 1846–70 Month January February March April May June July August September October November December Month January February March April May June July August September October November December

1846 4 4

1847 5 5

1848 4 4

1849 4 4

1850 4 4

1851 4 4

1852 4 4

1853 3 3

1854 5 5

1855 5 5

1856 6 6

1857 6 6

1858 5 4

4 4 4 4 4 4 4

5 5 5 5 5 5 5

4 4 4 4 4 4 4

4 4 4 4 4 4 4

4 4 4 4 4 4 4

4 4 4 4 4 4 4

3 3 3 3 3 3 3

3 3 3 3 3 3 3

5 5 4 4 4 4 4

5 5 4 4 4 4 4

5 5 5 5 5 5 6

6 6 6 5.5 5.5 5.5 5.5

4 4 4 3.5 3.5 3.5 3

4

5

4

4

4

4

3

4

4

6

6

4.5

3

4

5

4

4

4

4

3

4

4

6

6

9

3

4

4

4

4

4

4

3

4

4

6

6

5

3

1859

1860

1861

1862

1863

1864

1865

1866

1867

1868

1869

1870

3 3

3.5 3.5

7 7

4.5 4

5 5

7 7

4.5 4

5 4

3 3

2.5 2.5

2.5 2.5

2.5 2.5

3 3 4 4 4 3.5 3.5

3.5 3.5 3.5 3.5 3.5 3.5 3.5

5 5 5 5 5 5 5.5

3.5 3.5 3.5 3.5 3.5 3.5 3.5

4 4 3.5 4 4 4 4

6 6 6 6 6 6 7

3.5 3.5 3.5 3 3 3 3

3.5 3.5 4 4 3.5 3 3

3 3 2.5 2.5 2.5 2.5 2.5

2.5 2.5 2.5 2.5 2.5 2.5 2.5

2.5 2.5 2.5 2.5 2.5 2.5 2.5

2.5 2.5 2.5 2.5 5 6 6

3.5

3.5

6

3.5

5

8

5

3

2.5

2.5

2.5

6

3.5

4.5

5

4

7

6

4

3

2.5

2.5

2.5

6

3.5

4.5

5

4

7

4.5

4

3

2.5

2.5

2.5

6

Source: Dupont-Ferrier (1925) and Vitu (1864).

271

STATISTICAL ANNEXES

Table U. Bank rates in Belgium, The Netherlands, Germany, England, Italy (end-of-month data) 1855 January February March April May June July August September October November December 1856 January February March April May June July August September October November December 1857 January February March April May June July August September October November December 1858 January

Brussels

Amsterdam

Berlin

London

Genova/Italy

3 3 3 3 3 3 3 3 3 3 3 3

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

5 5 5 4.5 4 3.5 3.5 3.5 5 6.5 6.5 6.5

6 6 6 6 6 6 6 6 6 6 6 6

3 3 3 3 3 3 3 3 4 4 4 4

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

6.5 6.5 6.5 6.5 5 4.5 4.5 4.5 5 6.5 7 6

6 6 6 6 6 6 6 6 6 6 6 6

4 4 3.5 3.5 3.5 3.5 3.5 3.5 3.5 5.5 5.5 5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

6 6 6.5 6.5 6.5 6 5.5 5.5 5.5 8 10 8

6 6 6 6 6 7 7 7 7 7.5 10 8

4

n.a.

n.a.

4

6

272 February March April May June July August September October November December 1859 January February March April May June July August September October November December 1860 January February March April May June July August September October November December 1861 January February March April May

STATISTICAL ANNEXES

3.5 3 3 3 3 3 3 3 3 3 3

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3 3 3 3 3 3 3 3 3 3 2.5

6 6 5.5 5.5 5.5 4.5 4.5 4.5 4.5 4.5 4.5

3 3 3 3 4 4 3 3 3 3 3 3

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2.5 2.5 2.5 3.5 4.5 3 2.5 2.5 2.5 2.5 2.5 2.5

4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5

3 4 4 3 3 3 3 3 3 3 3 4

n.a. n.a. n.a. n.a. n.a. 3 4 3 3.5 3.5 n.a. 3

n.a. n.a. n.a. n.a. n.a. 4 4 4 n.a. n.a. n.a. n.a.

4 4 4.5 5 4 4 4 4 4 4 5 6

4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 5 5

5 4 4 4 3

3 3 3 3 3

n.a. 3 4 4 4

7 8 7 5 6

7 7 6 6 6

273

STATISTICAL ANNEXES

June July August September October November December 1862 January February March April May June July August September October November December 1863 January February March April May June July August September October November December 1864 January February March April May June July August September

3 3 3 4 4 4 4

3 3 3 3 3 3.5 4

4 4 4 4 4 4 4

6 5 4 3.5 3 3 3

7 6 5 5 6.5 5.5 5.5

4 3 3 3 3 3 3 3 3 3 4 4

3.5 3.5 3.5 3.5 4 4 4 3.5 3.5 4 4 4

4 4 4 4 4 4 4 4 4 4 4 4

2.5 2.5 2.5 2.5 3 3 2 2 2 3 3 3

5.5 5 5 5 5 5 5 5 5 5 5 5

3 3 3 3 3 3 3 3 4 4 6 5

4 3.5 3.5 3.5 3.5 3.5 3.5 3 3 3 4.5 5

4 4 4 4 4 4 4 4 4 4 4.5 4.5

5 4 4 3 4 4 4 4 4 5 6 7

6 6 5.5 5 5 5 5 5 5 6 8 8

6 6 6 4 4 6 6 6 6

5 5 5 5 5 4.5 4.5 4.5 6

4.5 4.5 4.5 4.5 5 5 5 5 6

8 6 6 7 7 6 7 8 9

8 8 8 8 8 8 7 7 8

274 October November December 1865 January February March April May June July August September October November December 1866 January February March April May June July August September October November December 1867 January February March April May June July August September October November December 1868

STATISTICAL ANNEXES

6 6 6

7 6.5 6

7 7 7

9 7 6

9 7 6

5 4 3.5 3.5 3.5 3 3 4 4 5 6 5

4.5 4 3.5 3.5 3.5 3 3 3 3 4 6 6

5 4 4 4 4 4 4 4 5 7 7 7

5 4.5 4 4 3.5 3 3.5 4 4.5 7 6 7

6 6 5 5 5 5 5 5 5 5 5 5

5 4 4 4 6 6 6 6 3 3 3 3

6.5 6 5.5 5.5 6.5 6.5 7 6 5.5 5 5 4.5

7 6 6 6 9 9 6 5 5 4.5 4.5 4

8 7 6 6 10 10 10 6 4.5 4.5 4 3.5

5 4 4 5 8 9 8 6 6 6 6 6

3 3 3 3 3 2.75 2.75 2.75 2.75 2.75 2.75 2.5

4 3.5 2.5 3 3 2.5 2.5 2.5 2.5 3 3.5 3.5

4 4 3 3 4 4 4 4 4 4 4 4

3.5 3 3 3 2.5 2.5 2 2 2 2 2 2

5 5 5 5 5 5 5 5 5 5 5 5

275

STATISTICAL ANNEXES

January February March April May June July August September October November December 1869 January February March April May June July August September October November December 1870 January February March April May June July August September October November December 1871 January February March April

2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

3.5 3 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

4 4 4 4 4 4 4 4 4 4 4 4

2 2 2 2 2 2 2 2 2 2 2.5 3

5 5 5 5 5 5 5 5 5 5 5 5

2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

2.5 2.5 2.5 3 3.5 3.5 3.5 3.5 4 4.5 5 5

4 4 4 4 4 4 4 4 4 5 5 5

3 3 4 4 4.5 3.5 3 2.5 2.5 2.5 3 3

5 5 5 5 5 5 5 5 5 5 5 5

2.5 2.5 2.5 2.5 2.5 2.5 5 7 4.5 3.5 4 4

5 4.5 4 3.5 3.5 3 5.5 6 4.5 4 4 4.25

5 4 4 4 4 4 8 6 5 5 5 5

3 3 3 3 3 3 5 4 2.5 2.5 2.5 2.5

5 5 5 5 5 5 5 5 6 n.a. n.a. n.a.

4 4 4 4

4 3.5 3.5 3.5

5 4.5 4 4

2.5 2.5 3 2.5

6 6 6 5

276 May June July August September October November December 1872 January February March April May June July August September October November December 1873 January February March April May June July August September October November December 1874 January February March April May June July August

STATISTICAL ANNEXES

4 4 4 4 4 4.5 3.5 2.5

3.5 3.5 3 3 3 3 3 3

4 4 4 4 4 4 4 4

2.5 2.5 2 2 4 5 3.5 3

5 6 n.a. n.a. n.a. n.a. n.a. n.a.

2.5 2.5 2.5 3.5 5 3.5 3.5 3.5 4 5 5.5 5

3.5 3 3 3 3 2.5 2.5 2.5 2.5 4 5 5

4 4 4 4 4 4 4 4 5 5 5 5

3 3 3 3.5 4 3 3.5 3.5 4.5 6 6 5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

5 4 3.5 5 5 6 4.5 4 5.5 5.5 7 6

5 4 4 4 5 5 5 5 5 5 6 5

4.5 4.5 4.5 5 6 6 5 4.5 4.5 5 5 5

3.5 3.5 4 4 6 6 3.5 3 5 7 6 5.5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

5 4 6 5 4 4 4 3.5

4.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5

4 4 4 4 4 4 4 4

3.5 3.5 3.5 4 3.5 2.5 3 3

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

277

STATISTICAL ANNEXES

September October November December 1875 January February March April May June July August September October November December 1876 January February March April May June July August September October November December 1877 January February March April May June July August September October November December

3.5 4.5 4.5 4.5

3.5 3.5 3.5 3.5

4 5 6 6

3 4 5 6

n.a. n.a. n.a. n.a.

4 3 4 4 4 3 3 4 4.5 4.5 4 3.5

3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3 3 3 3

4 4 4 4 4 4 5 5 6 6 5 5

3 3.5 3.5 3.5 3.5 3.5 2.5 2 2 4 3 4

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3.5 3.5 3.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

3 3 3 3 3 3 3 3 3 3 3 3

5 4 4 4 3.5 3.5 3.5 3.5 3.5 3.5 3.5 4.5

4 4 3.5 2 2 2 2 2 2 2 2 2

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 3.5 3.5 2.5

3 3 3 3 3 3 3 3 3 3 3 3

4 4 4 4 5 4 4 4 5 5.5 5 4.5

2 2 2 3 3 3 2 3 3 5 4 4

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

278 1878 January February March April May June July August September October November December 1879 January February March April May June July August September October November December

STATISTICAL ANNEXES

2.5 2.5 2.5 2.5 2.5 2.5 3.5 3.5 3.5 4.5 4.5 4

3 3 3 3.5 3.5 3.5 3.5 3.5 3.5 4 4 4

4 4 4 4 4 4 4 5 5 5 5 4.5

2 2 3 3 2.5 3 4 5 5 6 5 5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3.5 3 3 3 3 2.5 2.5 2.5 2.5 3.5 3.5 3.5

4 3.5 3.5 3.5 3 3 3 3 3 3 3 3

4 4 3 3 3 3 3 4 4 4.5 4.5 4

3 3 2.5 2 2 2 2 2 2 2 3 3

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Source: Compiled from The Economist and a variety of national sources.

279

STATISTICAL ANNEXES

Table V. Market rates in Europe monthly series (end-of-month data)

1861 March April May June July August September October November December 1862 January February March April May June July August September October November December 1863 January February March April May June July August September October

Paris

Torino

Amsterdam

London

Brussels

Vienna

Frankfurt Hamburg Berlin

4.75 4.5 4.5 4.5 4.5 4 5.5

6 5.5 5.5 5.5 5.5 5 5

3 3 3 3 3 3 3

6.75 5 5.75 6 5.25 3.75 2.75

4 4 3 3 3 3 3.5

5.5 5.5 5.5 5.5 5.5 5.5 5

1.5 2.25 1.5 2 2 2 2.5

2.5 2.5 2.5 2.75 2.75 2.75 2.5

3 3.5 2.5 2.5 2.5 2.5 3

5.5 4.25

6.5 5

3 3.5

2.75 2.75

3.5 3.5

5 6

3.5 3

3.25 3.5

3.25 3.25

4.25

5

4

3

4

6

3

3.5

3.25

4 4 3.5 3 3 3.1875 3 3.25 3.25

5 5 5 4.75 4.75 5 5 4 4.75

3.5 3 3 3.5 4 4 4 3.5 3.5

2.25 2.375 2.5 2.375 3 2.625 1.75 2 2

3 3 3 3 3 3.5 3 2.5 3

6 5 5 5 5 5 5 5 5

2 2 2 2 2.5 2.5 2 2 2

2.75 2.25 2.25 2.75 4.25 4.5 2.5 2.75 3.5

2.875 2.875 2.875 2.75 3 3.5 3 3 3

3.5 3.75

5 5

4 4

3 3

3 4

5.5 5.5

2.5 2.5

4.25 3.625

3 3.5

3.625

5

4

3

4

5.5

3

3.5

3.5

4.5 4.5 3.5 4 3.75 3.5 4 3.5 3.625

5.5 6 5 4.75 4.5 5 5 5 5

4 3.5 3.5 3.5 3.5 3.5 3.5 3 3

5 3.625 4 3 4 4 3.875 4 4

3 3 2.5 2.75 2.75 2.75 2.75 2.75 3.5

5.5 5.5 5 5 5 5 5 5 5

3 2.5 2.5 2.75 2.75 2.75 2.75 2.75 2.75

2.75 2.75 2.75 2.5 2.75 4 3 2.5 3

3.5 3.5 3 3.5 3.5 3.5 3.5 3.5 3.5

4.5

5.5

3

6

4

5

3.5

5

4

280 November December 1864 January February March April May June July August September October November December 1865 January February March April May June July August September October November December 1866 January February March April May June July August

STATISTICAL ANNEXES

6

7.75

4.5

5.875

5

5.5

5

5

4.25

7

8

5

7

5

5.5

4.5

5

4.5

6.5 6 6 6 5.5 6 6 6 6.75

7 8 7 7 7 7 6.5 7 8

5 5 5 5 5 4.5 4.5 4.5 6

8 6 6 7.25 6.75 6 7 7.75 9

5 5.5 5 4 4 5 5 5 6

5 5 5 5 5 5 5 5.5 6

4.5 4 3 3.5 3 3 3.25 3.5 5.5

3.75 4 3.75 4.5 3.75 4 4 6.5 5.5

4.5 4 4 4 5 5 4.75 4.75 6

7.75 6

9 7

8 6.5

8.75 7

6 6

6.5 6

5.5 5.5

4.25 4.5

7 7

4.5

6

6

6

6

5.5

5

4.5

7

4.5 3.5 3.5 3.5 3 2.75 3 2.75 3

6 6 5 4.75 4.75 4.5 4.5 4.5 4.5

4.5 4 3.5 3.5 3.5 2.5 3 3 3

5 4.5 4 4 3.5 3 3.5 3.875 4.5

4 4 3.5 3.5 3.5 3 3 3.5 4

5.5 5.5 5.5 5.5 5.5 5 5 5 5

5 3.5 3 3 3 3 3 3 3.25

4 2.5 2 2 2.5 2.5 3 3.375 5

4.75 3.5 3.5 3.5 3.5 3.5 3.5 3.5 4.875

4.5 3.75

4.5 4.5

4 6

6.875 5.875

5 5.5

5.5 5

5.5 5

5.75 5.25

6.5 6.5

4

4.5

6

7

5

5

5

6.5

6.5

4.75 3.75 3.25 3.5 4 3.5 3.25 2.5

5 4.5 4.5 6 8 n.a. n.a. n.a.

6.5 6 5.5 5.5 6.5 6.5 7 6

7.5 7 5.875 5.875 10 9.5 9 5

5.5 4 4.5 4.5 5 5 5 5

5 5 5.5 5.5 6 6 6 6

5 4 4.5 5 7 6 5 3.5

5.75 3.5 4.25 5.5 7.5 8 4 3.5

6.5 6 5.5 5.5 9 9 6 5

281

STATISTICAL ANNEXES

September October November December 1867 January February March April May June July August September October November December 1868 January February March April May June July August September October November December 1869 January February March April May June

3

n.a.

5.5

4.5

2.75

5.5

3.5

4

5

3 2.5

n.a. n.a.

5 5

3.75 4

2.75 2.75

5.5 5.5

4 3.5

3.5 3.75

4.5 4

2.5

n.a.

4

3.375

2.75

4

3.5

3.625

3.5

2.625 2.75 2.25 2.5 2.5 2 2.25 2.25 2.25

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

4 3.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

2.75 2.75 2.75 2.75 2.375 2.125 1.5 1.5 1.375

2.75 2.75 2.75 2.5 2.25 2.25 2.25 2.25 2.25

4 4 4 4 4 4 4 4 4

3.5 3 3 1.75 1.75 1.75 1.75 1.75 1.75

2.25 1.875 1.5 3.5 1.5 2 2 1.75 2

3.5 3.5 2.75 2.75 3.75 2.75 2.75 2.75 2.75

1.75 1.75

n.a. n.a.

2.75 3

1.25 1.375

2.25 2.25

4 4

1.75 1.75

2 3

2.75 2.75

2

n.a.

3

1.75

2.5

4

1.75

2.5

2.75

2 2.25 1.875 1.875 1.75 1.25 1.25 1.5 1.5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

1.5 1.5 2 2 1.75 1.75 1.5 1.625 1.5

2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5

4 4 4 4 4 4 4 4 4

1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75

2.5 1.5 2 1.75 1.75 1.75 1.75 1.75 1.75

2.75 2.75 2.5 2.5 2.5 2.5 2.5 2.5 2.5

1.375 1.5

n.a. n.a.

2.5 2.5

1.5 2.375

2.5 2.5

4 4

1.75 1.75

1.75 1.75

2.5 2.5

1.5

n.a.

2.5

3

2.5

4

1.75

1.75

2.5

1.5 1.5 1.5 1.5 2 2.25

n.a. n.a. n.a. n.a. n.a. n.a.

2.5 2.5 2.5 2.5 3.5 3.5

2.5 3 4 3.75 4.25 3

2.5 2.5 2.5 2.5 2.5 2.5

4 4 4 4 4 4

1.75 1.75 1.75 1.75 2.5 3

1.75 1.75 1.75 1.75 4.5 4

2.5 2.5 2.5 2.5 4 4

282 July August September October November December 1870 January February March April May June July August September October November December 1871 January February March April May June July August September October November December 1872 January February March April

STATISTICAL ANNEXES

2.25 2.25 2.5

n.a. n.a. n.a.

3.5 3.5 3.75

2.25 2.125 2.375

2.25 2.25 2.25

4 4 6

3 3 3

3.5 3.5 4

3 3.25 4

2 2.25

n.a. n.a.

4.5 5

2.625 3

2.25 2.5

6 5

4 3.5

4.25 3.5

4.5 4.25

2.25

n.a.

5

3

2.5

5

3.25

3.5

4.5

2.5 2 2 2.25 2.25 2.5 4 6 6

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

5 4.5 3.75 3.5 3.25 2.75 5.5 6 4

3 3 3 3 3 2.875 5.5 3.75 2.375

2.5 2.25 2.5 2.5 2.5 2.5 5 6 4.5

5 5 5 5 5 6 6 5 5

3.25 2.75 2.75 3 2.75 2.75 7.5 5 3.5

4 3 2.5 2.75 2.25 3 7 4 2.5

4.5 3.25 3.5 3.5 3.5 4 8 5.5 4

6 5.5

n.a. n.a.

3.75 3.5

2.5 2.25

3.25 3.5

5 5.5

3.5 3.75

2.5 4.75

4 4.5

6

n.a.

3.75

2.375

3.75

5.5

4.75

4.25

4.5

6 6 6 6 6 6 5 5 4.5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3.5 3 3 3.25 3.25 3.25 3.25 2.75 2.75

2.5 2.75 2.625 2.25 2.25 2.25 1.75 1.75 4

3.75 3.25 3.5 3.5 3.25 3.5 3.25 3.25 3.5

5 5 5 5 5 5 5 5 5

3.5 3.25 3.25 3 3.25 3.25 3.25 3.25 4

4.25 3.5 3.25 3.25 3.25 3.25 3.25 2.75 4

4 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5

5 5.5

n.a. n.a.

2.75 2.5

3.875 3.125

4 4.5

6.5 6.5

3.75 3.5

4.25 2.75

3.5 3.75

5

n.a.

2.5

3

2.25

6

3.5

2.75

3.5

5 5 4.5 4.75

n.a. n.a. n.a. n.a.

3.25 2.75 2.75 2.75

2.75 3 3 3.75

2.25 2.25 2.25 3.25

6 5.5 5 5

3.5 3.625 2.75 2.75

2.625 3.5 2.75 2.875

3.5 3.5 3.5 3.75

283

STATISTICAL ANNEXES

May June July August September October November December 1873 January February March April May June July August September October November December 1874 January February March April May June July August September October November December 1875 January February

4.75 4.25 4.25 4.25 4.75

n.a. n.a. n.a. n.a. n.a.

2.625 2.25 2.25 2.25 2.5

3.75 2.875 3.375 3.25 4.375

4.25 3.25 3.25 3.25 4

5 5 6 6 6

3.75 3.5 3.5 4 5

3.5 2.75 2.75 2.75 3.5

3.625 3.625 3.625 4 5

4.75 5

n.a. n.a.

4 4.5

6 5.5

5 5.5

6 6

4.5 5

3.5 4

4.25 4.75

5

n.a.

5

4.875

5

6

4.875

4

4.875

5 5 5 5 4.75 4.75 4.5 4.875 5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

5 4 4 4 4.5 4.75 4.75 4.75 4.75

3.5 3.5 4 3.75 5.875 5.5 3.125 3 4.75

5 4 3.5 5 5.5 5.5 4 3.5 5.5

6 6 5 5 5 6 4.5 4.5 5

3.5 3.5 4 5 5.75 5 4 3.5 3.75

4.5 4 4 4.5 6 5.5 4.5 4 4.75

3.5 3.5 4 5 5.75 5.25 4 3.75 4.25

6 5

n.a. n.a.

4.75 5.5

7 5.25

5 6

5 5

4 3.5

4.5 4.5

4.5 4.5

4.75

n.a.

4.75

4.25

5

5

3

4

4

4.75 4.5 4.25 4.25 4.25 3.5 3.5 3.25 3.75

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

4.25 3.25 3.25 3.5 3.25 3.25 3.25 3.25 3.5

3 3.25 3.5 3.75 3.25 2.25 3 2.75 3

4.5 3.5 5.75 4.5 3.75 3.5 3.25 3 3.25

5 5 5 5 5 5 5 5 4.5

3 2.75 2.75 3 3 2.75 2.625 2.5 3.5

3 2.5 2.75 3.25 3 2.75 2.625 2.5 3.25

3 2.75 2.75 3.25 3 2.75 2.625 2.5 3.75

3.75 3.75

n.a. n.a.

3.5 4.5

3.625 4.25

4.5 4.25

4.5 4.5

4.625 4.25

4.5 4

4.375 4.5

3.5

n.a.

3.5

5.25

4.25

4.5

4.5

4.5

5

3.625 3

n.a. n.a.

3.5 3.25

2.75 3.375

3.75 2.75

4.5 4.5

3.5 2.5

3.75 2.5

3.625 2.5

284 March April May June July August September October November December 1876 January February March April May June July August September October November December 1877 January February March April May June July August September October November December 1878

STATISTICAL ANNEXES

3.125 3.25 3 3 3 3.25 2.75

n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3.5 3.25 3.25 3.25 3.25 3 2.75

3.375 3.125 3.375 3.25 2.125 1.5 1.875

3.5 3.5 3.5 2.75 3 3.25 4.5

4.5 4.5 4.5 4.5 4.25 4.25 4.25

2.875 2.75 2.875 3.25 4 4 5.25

3 3 3 3.5 4 4 5.5

2.875 2.875 3 3.75 4.25 4 5.5

3.25 3.25

n.a. n.a.

3 3.5

3 2.5

4 3.75

4.5 4.5

5.125 3.75

5.375 3.75

5.125 3.875

3.75

n.a.

3

3.625

3.5

4.75

5

5

4.875

2.75 2.75 2.75 2 2 1.25 1.25 1.75 1.625

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2.75 2.75 2.75 3 2.625 2.625 2.625 2.75 2.75

3.375 3.625 2.875 1.25 1.625 1.25 1.125 1.125 0.75

3.25 2.75 2.75 2.25 2.25 2 2 2 2

4.75 4 4.25 4.375 4 3.875 3.875 3.875 4.375

3.625 2.75 3 2.875 2.5 3.125 2.5 2.5 3.125

3.75 3 2.75 3 2.25 3.25 2.75 2.75 2.75

3.25 2.625 3.375 2.875 2.5 3.125 2.625 2.75 3.25

2.75 1.75

n.a. n.a.

2.5 2.75

1.25 1.5

2.5 2.5

4.5 3.875

3.5 3.125

3.25 3.25

3.5 3.125

2.5

n.a.

2.75

1.5

2.75

4.25

3.5

3.5

3.75

2.5 1.75 2 1.75 1.5 1.375 1.25 1.625 1.5

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3 2.625 2.75 2.75 2.75 2.5 2.5 2.75 2.75

1.375 1.75 1.875 2.75 2.625 2.125 1.125 2.75 2.625

2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.25

4 3.875 3.75 4.5 4.5 4.5 4.25 4.5 4.625

2.25 2 2.25 3.125 3.125 3.5 3.375 3.125 4.5

3.375 2 2.5 3 3.25 3 3.25 2.5 4.25

2.25 2.25 2.5 3.25 3.375 3.5 3.375 3 4.625

2 1.5

n.a. n.a.

3 2.75

3.25 3.25

3.25 3.25

4.5 4.125

4 3.75

4.25 4

4 4.5

2

n.a.

2.75

3.25

2.25

4

4.25

4

4

285

STATISTICAL ANNEXES

January February March April May June July August September October November December 1879 January February March April May June July August September October November December

1.5 1.75 2 1.75 1.5 1.875 1.875 1.875 1.625

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2.5 2.875 2.75 3.25 3.25 3.5 3.5 3.5 3.5

1.5 2 2.75 2.625 1.625 2.625 3.75 4.25 4

1.75 2.25 2.25 2.25 2.25 2.5 3.25 3.25 3.25

3.75 3.75 3.75 4 3.75 4.25 4.25 4.25 4.375

2.75 2.25 2.25 2.75 2.75 3.5 3.125 3 3.75

2.5 2.25 2.25 2.75 2.5 3.5 2.75 2.75 3.75

2.5 2.5 2.25 2.75 3 3.75 3 3 4.25

2.875 2.75

n.a. n.a.

4 4

5.5 4.25

4.25 3.75

4.5 4.25

4.5 4.25

4.25 4

4.5 4.25

3

n.a.

3.75

4.25

3.75

4.25

3.75

3.5

4

2.5 2 2.125 2.5 1.75 1.75 1.5 1.75 1.875

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3.75 3.25 3.25 3.25 3 2.5 2.75 2.75 2.5

2.625 2.75 1.875 1.125 1.125 1.125 0.875 1.125 0.875

3.25 2.75 2.25 2.375 2.25 1.75 1.875 1.875 2

4.25 4 3.75 4.25 3.75 3.75 3.75 3.75 3.5

3 2.125 2.125 2.25 2 2.5 2 2.25 3.25

3 2 2 2 2 2.25 2 2.25 3.25

3 2.25 2.25 2.125 2.125 2.5 2 2.5 3.5

2.875 2.5

n.a. n.a.

2.75 2.75

1.875 1.875

3.25 3

4 4

4.125 3.625

3.75 3.625

4.125 3.75

2.875

n.a.

2.75

2.75

3

3.75

3.25

3.25

3.5

Source: The Economist.

286

STATISTICAL ANNEXES

PERIODICALS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

American Economic Review Annales: Economies, Sociétés, Civilisations Annuaire statistique de la France Bankers’ Magazine Course of Exchange [Wetenhall, James Box, publishers] Economic History Review Economic Journal Economist (The) Economiste Français (L') Explorations in Economic History Histoire des Entreprises Indépendance Belge International Review of the History of Banking (Revue internationale d'histoire de la banque or Rivista internazionale di storia della banca) Journal des Economistes (Le) Journal of Economic and Business History Journal of Economic History Journal of Economic Perspectives Journal of European Economic History Journal of Money, Credit and Banking Journal of Political Economy Journal of the Statistical Society Journal de la Société de Statistique de Paris Monatsbericht—Schweizerische Nationalbank Moniteur (Le) Nuova Antologia Quaterly Journal of Economics Revue des Deux Mondes Revue d'Histoire Moderne et Contemporaine

Sources and References 1. ARCHIVES Banque de France archives Boxes (Despite their mouth-watering titles [here translated], the contents are often incomplete). (a) (b) (c) (d) (e) (f) (g)

Bullion: imports and exports 1852–1916. Bullion: trade, silver ingot transactions, purchases of gold and silver 1848, buying and selling operations 1876, transactions with foreign banks. Bullion: registers—Report of the Gold and Silver Commission. Gold ingot and coin transactions. Mint vouchers. Gold: movements 1871–1949—commitments. Gold: notes 1872–1917. Gold production—gold reserves (after 1911). Currency surveys. (Contains a detailed analysis of the Banque's reserves at 30 April 1868: by type of coin, domestic/foreign origin, and by Branch. Also contains an analysis of the coins given in payment to the Banque de France on 14 August 1878, in connection with the ﬁrst Currency Survey).

Hand-written ledgers (a)

Minutes of the General Council (numerous volumes).

(b)

Index of the Minutes (a key for acceding to the Minutes, which greatly facilitates consultation).

(c)

Banque de France, composition of reserves, Paris 1803–58, Paris and branches 1852–61. (This is a retrospective compilation. According to the document, ‘Since the Banque's origin until 1 January 1803 … no document has been found which would enable the ﬁgures for the gold and silver in the reserves to be determined’. From 1803 to 1851, data are given, but they concern Paris only. Beginning in 1852, the Register's authors subtracted the Paris data from the comprehensive ﬁgures published in the Moniteur. This gave a monthly series, measured at around the 15th of each month.)

(d)

Banque de France: Daily statistics.

Paris Mint archives An inventory of the Paris Mint archives may be found in the book by J.-M. Darnis.

288

SOURCES AND REFERENCES

Boxes Series K, International Monetary Conventions (2 boxes). (A wealth of details on the Latin Union and the decisions taken in the 1870s.) Series O, the Delebecque case (ﬁle). (This is the ﬁle on Henri Delebecque who in 1876 embezzled over a million in silver belonging to the Rothschilds. The trial provides interesting insights into the relations among the directors, government, and High Finance.)

Hand-written registers (a)

Register: Cours authentiques des matières d’or et d’argent, Ms Folio 310 (daily ﬁgures; six quotations per week).

(b)

Registers: Monnaies: Fabrications et délivrances; or et argent Ms. Folio 491 à 632.

Archives Rothschild (Housed in the Archives Nationales) [Bertrand Gille's classiﬁcation of the Archives Rotschild held in the National Archives is the most convenient avenue for exploring both the correspondence and the different ﬁles dealing with matières, that is, precious metals.] (a) (b)

(c)

132 AQ 891 sqq: Copybook of Matières letters, Precious Metals Correspondence. Several volumes covering period 1857–80. 132 AQ 86. A box containing (i) Afﬁnages et Métaux Précieux 1829–69 (contracts between the Rothschilds and minting or reﬁning shops), (ii) The Matières register (a catalogue full of all sorts of details on gold and silver shipping operations in Europe and throughout the world-correspondents, costs, practices of the different markets as regards assays and minting). 132 AQ 122. Relations with the Banque de France. 1848 crisis. (Purchases of silver in London and from the Bank of England. Technical correspondence, supplementing certain details contained in the Banque de France archives.)

2. PRINTED SOURCES: ENQUIRIES AND OFFICIAL REPORTS Banque de France archives [Most of the ofﬁcial reports, conferences etc. for the period are gathered in a 16-volume collection entitled La Question Monétaire. A copy of this series (mentioned in the Foreign Affairs archives in connection with the Latin Union) may be found in the Banque de France archives, reference 612 D.C. 98 sqq.] (a) Vol I. 1865 Monetary Conference. Accession of Greece. (b) Vol II. Pontiﬁcal currencies.

SOURCES AND REFERENCES

289

(c)

Vol III. 1867 International Conference. Monetary negotiations between France and Austria. Report from the English Royal Commission on International Coinage. (d) Vol IV. Currency Standard, Commission and Enquiry 1868–9. (e) Vol.V. Enquête sur la Question Monétaire, 1869–70. (f) Vol VI. Malou: Documents relating to the currency question 1873–6. (g) Vol VII. Convention additional to the 1865 Monetary Convention (January 31, 1874). (h) Vol VIII. 1875 Monetary Convention, Declaration of 5 February 1874. (i) Vol IX. Report from the Select Committee on the Depreciation of Silver. (j) Vol X. 1876 Monetary Conference, Declaration of 3 February 1876. (k) Vol XI. and XII 1877 and 1878 Monetary Conferences replaced by diplomatic negotiations (l) Vol XIII. Monetary Convention of 5 November 1878, Arrangement concerning the execution of Art. 8 of the Convention of 5 November 1878. (m) Vol XIV. 1881 International Monetary Conference. (n) Vol XV. Monetary Convention of 6 November 1885. Additional Act to the Convention of 6 November 1885. (o) Vol XVI. Foreign gold coinage accepted in France.

Bank of England Library (London, Threadneedle Street) (a) (b)

Printed registers: Wetenhall, The Course of Exchanges (begun in 1859; see References). Printed registers: Various collections of The Course of Exchange prior to 1859 (Castaing, Luytens, and Ripley, etc).

Commissions and Conferences concerning the monetary question [A good proportion of the minutes of the conferences and reports relating to the monetary question is to be found in the collection La Question Monétaire, kept in the Banque de France archives (see above), or in Jules Malou (1880). There is also the bibliography compiled by de Crécy (1962), which covers some of the same ground as our work. We provide here a summary list of the different documents, including the library where they are held, their contents, and ideas of their importance.] National Commissions 1857 Enquiry:Documents Relatifs à la Question Monétaire, Ministry of Finance, Paris, Imprimerie Impériale, 1858, 2 vols; Library of the Institut, Quai de Conti, Paris. Contents: (i) The report by the Commission Instructed to Investigate the Monetary

290

SOURCES AND REFERENCES

Situation, along with various documents on the reasons for adopting the double standard in 1803. (ii) Abstract of the ‘Replies by the Paymasters-General on the Monetary Situation in their Department’. (iii) Abstract of the survey conducted by the Banque de France on the ‘Reasons for the Persistent Reduction in the Quantity of Gold and Silver Specie’ (carried out at Alphonse de Rothschild's suggestion). Members: Schneider (Chair), Parieu, d’Argout, Beaumont, Vuillefroy, Boinvilliers, le Roux, Chevalier, Gréterin, Pelouze, André. 1861 Enquiry: Rapport sur la Question des Monnaies Divisionnaires d’Argent, 1 vol. Ministry of Finance, Paris, Imprimerie Impériale, 1862; Library of the Paris Mint. Contents: (i) A discussion of the problems pertaining to the disapearance of silver coins and means to remedy them. (ii) A regional survey on small change needs. Members: Schneider (Chair), Parieu, Dumas, Chevalier, Vuitry, Gouin, de Germiny, Pelouze, de Sénarmont, de Bosredon, de Bonneclose. 1865 Enquiry: Enquête sur les Principes et les Faits Généraux qui régissent la Circulation Monétaire et Fiduciaire, 6 vols, Ministry of Finances, Paris, Imprimerie Impériale, 1867; Bibliothèque nationale de France. The different volumes cover a number of debates concerning the monetary standards controversy, the freedom to issue money, the Banque de France, etc. 1867 Commission: Documents Relatifs à la Question Monétaire, Paris, Imprimerie Impériale, 1868; Bibliothèque Nationale. Contains the Commission's report and the ‘Opinion of the Banque de France’. Also contains (see below): (i) abstract of the survey carried out among the Paymasters-General in 1868; (ii) abstract of the survey carried out among the Chambers of Commerce in 1868. Members: Parieu (Chair), Chevalier, de Lavenay, Wolowski, Gouin, Andouillé, Louvet, et Dutilleul. 1868–9 Commission and Surveys: Etalon Monétaire: Commission et Enquête, in Enquête sur la Question Monétaire, vol. V (see above); Banque de France archives. Contains: (i) the Commission's Report; (ii) the surveys carried out among the Paymasters-General and the Chambers of Commerce in 1868. 1869–70 Enquiry: Enquête sur la Question Monétaire, Paris, Conseil Supérieur du Commerce, de l’Agriculture et de l’Industrie, Imprimerie Nationale, 1872; Bibliothèque de Droit, rue Cujas, Paris (the proofs having been destroyed in the Ministry of Finance ﬁre, publication was somewhat delayed). Members: le Roux (Chair), Louvet (Chair), Rouher, Parieu, Barrot, Dumas, Chevalier, Gaudin, Hubert-Delisle, Gressier, Darblay, Cornudet, de Lavenay, de Franqueville, Ozenne, Amé, Meurand, Zaeppfel, Denière, Clerc, Carette, Picard, Pastré, Barbet. British Commissions 1868 Commission on International Coinage: Report from the Royal Commission on International Coinage, together with the Minutes of Evidence and Appendix, London, H.M.S.O., 1868; Bank of England Library.

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291

1876 Commission on the Depreciation of silver: Report from the Select Committee on the Depreciation of Silver, London, 1876; British Library. 1886 Commission on Gold and Silver: Royal Commission on Gold and Silver, London 1886; Bank of England Library. Contains the testimony of the broker Pixley and a number of details concerning trends in gold and silver production.

3. INTERNATIONAL CONFERENCES Conférence Monétaire Internationale de 1865 (founding of the Latin Union). Ministry of Finance archives. Conférence Monétaire Internationale de 1867 (universal currency). Cujas Library, Paris. Conférence Monétaire Internationale de 1874 (Latin Union Conference on limiting the minting of silver). Cujas Library. Conférence Monétaire Internationale de 1875 (second Latin Union Conference on the minting of silver). Cujas Library. Conférence Monétaire Internationale de 1876 (third Latin Union Conference on the minting of silver). Cujas Library. Conférence Monétaire Internationale de 1876, nicknamed ‘The American Conference’ (ﬁrst attempt at international cooperation for a coordinated resumption of silver minting). Cujas Library. Conférence Monétaire Internationale de 1881 (second attempt at a coordinated resumption of silver minting). Cujas Library.

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Index Note: ‘n’ refers to a footnote. agriculture 192; rise in farm prices 93 Ain Department 48 Allard bank 139 n41 alloy coins 185 n25 Almaden 134 American Civil War 161 Amsterdam, gold--silver exchange ratio 48 Anglo-French monetary relations 49--52 Anglo-French treaty 193 appreciation, and exchange ratios 29 arbitrage 29, 31; bimetallic 10, 113, 131, 158, 178, 208; costs of 29--30, 32, 34--5, 36, 39--40, 44, 177, 188abrasion 41-2brokerage and assays 41interest loss 42--3international 61--2minting 41transportation 40--1; geography of 34--8; global 129--31, 141--9; gold--silver ratios 18, 28; networks 143--50; private 99 arbitrage trade 165 arbitrated par of exchange, and bullion points 57--61 Aron, Jules 134 n23 Asia, demand for silver 160–2 assaying, and arbitrage costs 41 Aupetit, A. and bimetallism 10 Australia 6, 7, 35, 63, 87, 123, 134, 157 Austria 195; ‘silver bloc’ 6 Bagehot, Walter 119 n45 balance of payments ; bimetallism 49–52; exchange rate 52–3, 71; monetary approach to 159; monetary equilibrium 67; regional 48–9 Banca Nazionale, reserve swaps with Banque de France 112 Bank Lambert 139 n41, 146, 149 Bank of Belgium 139 n41, 146 n65 Bank of England 1, 71, 118–19; gold purchases 5 n11, 116; reserve swaps with Banque de France 112; role of 100; silver sales to Banque de France 117–18 Bank of Italy, see Banca Nazionale Bank of Portugal 116 Bank of Prussia, specie holdings 3–4 Bank of Russia, reserve swaps with Banque de France 112 banking 129; bullion shipping 131–2; conﬂict of old and new 150–2; growth in 93 banking networks 149–50 banking school 151 banks of issue, seecentral banks Banque de France 87, 88, 90, 100, 101, 203; bimetallism 101–2, 124–7, 204; bullion markets 99–103, 114–15, 116–22, 230–1; constraints on 103–5; criticism of 100–1,

117, 152; deregionalization of money market 48 n2; General Council 103, 106, 107–10, 117, 119; gold holdings 38; gold purchased by 232; guarantor of last resort 203–6, 208, 209; interest rates 116–17, 125; Latin Union 206; metallic revolution 122–3; Mint Vouchers 42–3; Paris Mint 133; payment system 137; rational payments policy 103–10; reserve management 110–13, 124; reserve swaps 112–13; reserves 36–7, 112 n22, 205 n59; specie purchase 113–24, 125; suspension of silver minting 206, 207–8 Barings 116, 117 Barro, R. J. 15 Basses-Alpes Department 48 Beaussier, Alexandre 136 Belgium 146–7, 188, 192, 206; abandons gold 157; bimetallic bloc 6; estimating specie stock

INDEX

80; limits on silver coining 177; specie holdings 4 Berlin Economists’ Society 182 bills of exchange 3 bimetallic arbitrage 10, 113, 131, 158, 178, 208 bimetallic bloc 6; monetary stability 8 bimetallic constitution ; possible regimes 11–12, 27, 28–9; testing for regime 29–34 bimetallic leagues 191 bimetallism 5 n13, 9–10, 27; balance of payments 49–52; Banque de France 101–2, 124–7, 204payments policy 103–10reserve management 110–13; coordination 15, 23–4; destabilization 199–208; double valuation 55; effective 11–12, 27, 29–34, 44–5; end of 176–7, 178fundamentals theory of 178, 179–81political economy explanation 178–9, 189–93strategic unsustainability theory 178, 181–5transaction costs theory of 178, 185–9; exchange rate stability 6–8; exchange rates 67–8, 73; exchange ratios 16–18, 28–9, 44, 45; ﬂexibility of 173–4; French mediating role 48 n3; gold–silver ratios 19–26; gold–silver substitution 158, 182–3; increased gold production 171–3; inﬂation 166; international 1, 144; international adjustment mechanism 157–8; international ﬁnanciers 130–1; limping 178, 208; Mint parity 55; monetary equilibrium 172–3; monetary theory of international 168–71; partial equilibrium 16–18; reduced need for specie 175; regional support for 194–5; regionalization 45–6; retreat from 208; rules of the game 102; scientiﬁc 17–18; self-regulating system 99, 113; specie purchases 116; theoretical underpinnings of 15–27; twin functions of bullion 16; see also international bimetallism Bismarck, Otto von 178, 181 Black, Shirley J. 179 n9 Bleichröder (Bismarck's banker) 192 Bloomﬁeld, A. I. 99, 203 n56, 208 Bordeaux, minting concessions 136 Bordo, Mike 1 Bouvier, J. 151 n72, 198 n45 Brazil, and ‘gold bloc’ 6 Brittany 38 brokerage, and arbitrage costs 41 Brouckère, Charles de 139 n41 Brussels 40, 146–7 Brussels Mint 139 n41 Bryan, William Jennings 10, 189 bullion ; coin-minting 135–41; effects of stock increase 163; international ﬂows and equilibrium preservation 174; mining 132 n14; private holding of 3–4; production statistics 238–9; quotations on London Stock Exchange 217–19; quotations on Paris Bourse 217; reﬁning 132–5; Rothschilds’ network 143–9; shipping 131–2, 189; twin functions of 16 bullion markets 4–5, 31, 49, 129; Banque de France 99–103,

313

114–17; bimetallic arbitrage 34; equilibrium 51, 73; monetary equilibrium 67; trends in 124–5 bullion movements ; trade 159–60; international 52 bullion points 53–4, 59–60; arbitrated pars of exchange 57–61; constructing 61–8; exchange rates 65, 69–70 bullion production, economic effects of 172–3 bullionist controversy 53 n10 Bussière, Baron Renouard de 136, 142, 152 Cairnes, John E. 159, 165; gold output and silver ﬂows 162–3 California 7, 35, 42, 44, 45, 63, 70, 71, 87, 91, 123, 134, 157 Cambry, de, Director 139 Cameron, Rondo 92 central banks ; Gold Standard 99, 102; limited role of 8; London balances 1; specie holdings 3–4 Cernuschi, Henri 191; origin of bimetallism 5 n13 chain rule (règle conjointe), and global arbitrage 129–30 Chaunu, P. 15

314

INDEX

Chen, C. 15 Chevalier, Michel 157, 158, 192, 198, 233; bimetallism 9; demand for silver 161–2; rate of wear 42, 220; trade and bullion movements 159 China ; imports from 158; ‘silver bloc’ 6 Clark, T. A. 31 n6 Clermont-Ferrand 37 coinage 76; alloy coins 185 n25; economics of 235–7; estimating age of circulating 228–9; expansion of production 7; gold chronology 87–8; minting 42–3, 125–41; role of 2–3; silver chronology 84–7; smallerdenomination 185–6, 188; sorting 43; wear and tear 41–2, 220–1; see also specie stock Collins, Michael, on exchange rate stability 7 Collot, Director 139 commercial banks, rise of 3 Commission des Monnaies 135, 138, 142 communications 132 n13, 145 n55, 193 Compagnie du Nord 145 n55 Comstock Lode 179, 181 consumption patterns, changing 165 Continental System 84 convertibility 113 n29; restoration of 86 coordination ; bimetallism 15, 23–4; failure 177 Cottrell, P. L. 101 n7, 158, 164 counterfeiting 186 Cours d’Economie Politique 161 Crédit Mobilier 152 currencies, competing 15, 196 Currency Commission (1869) 233 currency demographics, estimating specie stock 84–8 currency school 151 Currency Standard Commission 101–2 currency systems, transience of 176 d’Argout, Governor 101 n8 Darnis, Jean-Marie 135 n29 De la Baisse Probable de l’Or 161 Delebecque, Henri Archange 142, 149, 151–2 Denuc, Jules 77; estimating specie stock 83 depreciation ; exchange ratios 29; silver 180–1, 189 Dierickx, Director 139, 140, 142 Digne 48 double evaluation 55 double standard , seebimetallism Dumas, M 43 n29 Durand, Regent 119, 125 Dutilleul (Director of the Treasury) 200 Economist, The 32, 43, 72, 125, 158, 159 Eichengreen, B. 191 Eichtal, reﬁning 133 Einaudi, Luca 195–6 Enquête Monétaire , seeMonetary Survey

equilibrium ; general 163, 168, 174; gold–silver ratios 16–18, 19–21; monetary 67, 157, 172–3 Essays in Political Economy 162 European Monetary System 6 exchange rates ; arbitrated pars of exchange 57; balance of payments 52–3, 71; bimetallism 67–8, 73; bullion points 65, 69–70; competing currencies 15; equilibrium 52–3, 67 n38; ﬂuctuations 70–3; gold and silver parities 55–6; gold and silver points 63–70, 71, 73; Gold Standard 52–3, 66–7; interregional 48; London-Paris 49–52; mint parities 53 n13; movements and equilibrium 73; silver outﬂows 122; stability of 6–8; variable parity 54–5 exchange ratios ; ﬂuctuation of 29; general equilibrium model 19–21, 24–6; gold–silver 16–18, 28–9, 44, 45, 47–9, 163; gold–silver points 31, 32, 32–4, 35, 44; increased silver supply 179; international 48–9; interregional balances 48; interregional payments 47; scientiﬁc bimetallism 17–18; stabilization of 48–9, 157; testing stability 29–34 export points ; gold 52–3; specie 53 externalities ; network 196; strategic 196

INDEX

Faucher, L. France's mediating role 48 n3, 107 n21 Feer-Herzog (Swiss ﬁnancier) 183 Ferguson, Niall 130 Finistère 38 Fisher, Irving 181 n13, 234; bimetallism 9–10; gold–silver ratios 18; reservoir model of bimetallism 17 Fohlen, Claude 129 n3 Fould, Benoît 150 n71, 197 Foville, Alfred de 77–9 Foville's Method, and estimating specie stock 77–81 Fraissinet, Roux de 146 Franco-German rivalry 209 Franco-Prussian war 176, 198, 199, 208; Indemnity 86–7, 87–8, 90, 178, 181–2, 183 Frankfurt, Treaty of 199 free trade 193 free-rider argument, and end of bimetallism 183 French Mint, minting costs 41 Friedman, Milton ; arbitrage costs 32; bimetallic arbitrage 10; bimetallism 9; gold–silver points 31, 32 fundamentals theory, and end of bimetallism 178, 179–81 Gadala Saint-André 43 Gallarotti, G. M. 183 Genberg–Zecher criterion 167 Germany ; currency reform 181–5, 187, 197–8; exchange rate stability 197; Gold Standard 176–7, 195, 197, 199; irrational policy 208; ‘silver bloc’ 6; silver sales 206–7; specie holdings 3–4 Germinal Act (1803) 5, 127, 200 Giffen, R. non-monetary use of bullion 16 Gille, Bertrand 130 Gille, Geneviève 179 n9 gold ; Bank of England purchases 116; Banque de France's purchases 114–24, 126; coin chronology 87–8; effects of stock increase 35–6, 163–6, 172–3; ﬂows and monetary equilibrium 172–3; free international circulation 3; growth in supply of 7, 71; import and export points 52–3; inﬂation 157, 158, 164, 192; price stability 189; rate of wear 42, 220–1; scramble for 183; substitution 35–8, 172–3, 182–3; twin functions 16; uses of 16, 17 gold bloc 6 gold points 59, 61–3; arbitrated pars 58; exchange rate 63–70, 71, 73; mint parities 54; variable parity 54–5 Gold Standard 1, 176, 196, 209; anomalies of 208–9; attraction of 176; bimetallic equilibria 22; central banks 102; controversies over 195–8; effective 11–12, 27, 28; exchange rates 52, 66–7; Germany adopts 181–2; gold points 31; ‘Great Depression’ 8; regional support for 195; self-regulating or managed 99; views on inevitable triumph 1–2 gold–silver points 31, 32–4, 44; spatial dependency 35 Goldschmidt, B. 146

315

Great Britain , seeUnited Kingdom Great Depression (1873–96) 8, 209 Gresham's Law 26 Hamburg 5, 31; gold–silver exchange ratio 48; Haupt, O. 61 Haute banque 128–30, 131 n9; conﬂict with new bankers 150–2; economic theory 233–4; ﬂexibility 150–1; minting 138–9; reﬁning industry 133 Hay, Hector 238 Heckscher–Ohlin theorem 47 Helfferich, Karl 182, 197 Hesiod 2 High Council on Trade 152 Hill, Robert Anderson 236 Hirsch, bullion processing 133 Holland 192, 195; abandons gold 157; silver 176; silver bloc 6 Hottinguer bank 117 House of Rothschild, see Rothschilds Hughes, J. R. T. 164 Hume, David 165; price-specie ﬂow mechanism 164

316

INDEX

Imperial Bank of Russia 117 import points ; gold 52–3; specie 53 incomes, rise in farm 93 inconvertibility, introduction of 86 Indépendance Belge 112 India 36; imports from 158; silver intake 160; Silver Standard 6, 50 n4 indifference, threshold of 105–6 inﬂation 165–6; bimetallism 166; gold 157, 158, 164, 192; silver 189 ingots ; practicality of 4; pricing 4–5 interest loss, arbitrage 42–3 interest rates, Banque de France 116–17, 125 international bimetallism 8–9; ﬂexibility of 173–4; monetary equilibrium 172–3; monetary theory 168–71 international ﬁnance , seeHaute banque International Monetary Conference (1867) 195, 196 interregional payments, gold–silver ratio 47 investment, and gold and silver circulation 48 Italy 41 n22, 188, 206; bimetallic bloc 6; limits on silver coining 177; specie holdings 4 Japan ; imports from 158; silver bloc 6 Jevons, Stanley 83 n12, 88 n23, 159, 165, 228; bimetallism 9; difﬁculty of estimating specie stock 80; drain on silver 162–3; Foville method 77–8 Jourdan, Francis, Mint Vouchers 43 Juglar, Clément 44 n36, 56 Kindleberger, C. P. 192 Kreglinger, Director 147 La Rochelle mint 137 Lafﬁtte 130 n5 Lafond, Regent 101 n8 laissez-faire, and scientiﬁc bimetallism 17–18 Landes, David 150 latent reserves 3 n9 Latin Union 41 n22, 188 n27, 195, 196, 206; bimetallic bloc 6; currency issue 206; limits on coining of silver 177; suspension of silver minting 207–8 Latin Union Conference 178 n5, 199 Laughlin, J. L. ; bimetallism 9; silver 2 Laveleye, Emile de 17 n5; international bimetallism 8 n23 law, and gold–silver ratio 17–18, 23, 27 Law of One Price 58 legal ratio, gold–silver price 5 Lévy-Leboyer, M. 188; specie stock 77, 91, 92 Lille 40 Lille mint 136, 139, 140 limping bimetallism 178, 208 Locke, John ; bimetallism 9; gold–silver exchange ratios 16 London 5, 31, 33, 71, 73; gold–silver exchange ratio 48; monetary relations with Paris 49–52; role of 49–50 London Stock Exchange, bullion quotations on 217–19

Luzzatti, L. 203 Lyons ; minting concessions 136; silver from Italy 41 n22 MacCloskey, D. N., sampling methods 80 n11 Machlup, F. 87, 183 Magne, P. 199 markets ; Gold Standard 99; gold–silver ratios 17–18 Marseilles 36, 37, 40, 48; minting concessions 136 Marseilles mint 137, 140 Martin (reﬁning ﬁrm) 134 Marx, Karl 2, 189 melting 76 merchant banking, and Haute banque 129 Mertens, J. 176 n1, 202 n50; bimetallism 10 metallic blocs 6 Mexico 179; silver bloc 6 Mill, John Stuart 115 n35, 193; gold–silver exchange ratios 16 mining 132 n14 Ministry of Finance 75, 199 Mint Administration 138 mint parities 53–4; bimetallism 55; gold points 54

INDEX

Mint Price 54, 135 Mint Tarif 70 Mint Vouchers 42–3, 43 n29, 177 minting ; arbitrage costs 41; nationalization 138; reﬁning 136; restrictions on 177, 199, 202; steam press and quality 186; suspension of silver 177, 206, 207–8 minting houses 137 n36 minting industry 135–41 monetary equilibrium, and gold and silver ﬂows 172–3 monetary substitutes 3 Monetary Survey 48, 75–6, 80–1, 83, 90 n28, 192, 193–4 monetary system ; central authorities 99; interactive nature of 2 monetary theory, international bimetallism 168–71 monetary union ; global 78, 193; see alsoLatin Union monetization 92–3 money market, de-regionalization of 48 n2 money supply ; increased gold stocks 163; increasing 163–4; specie 3–4 monometallism ; effective 29 n1; gold 78 Morgenstern, O. 31, 32; exchange rates 52 Nantes 37 Napoleon III 93 Napoleonic Wars 84, 87 network externalities 176, 196 Newton, Isaac, and Gold Standard 22 Niehans, J. 15 Nogaro, B. and bimetallism 10 Ofﬁcer, L. H. 31 n6, 34 parachute process 158 Pareto, V. 10 Parieu, E. de 130 n8, 178 n5, 198, 201, 233; on silver 2 Paris 31, 42, 47, 53, 71, 73; Banque de France's payments policy 106–10; bimetallic arbitrage 34–8; monetary relations with London 49–52; transportation costs 40–1 Paris Bourse ; brokerage fees 41; bullion quotations on 217 Paris Mint 43, 70, 136, 139, 142, 152, 186, 237; Banque de France 133; Rothschilds 139–41, 142 parities, bimetallic 52–7 Peel Act 100 Péreire, Emile 117 Péreire, Isaac 152 Péreire brothers 125, 142, 150, 152 Pinard 231 Pixley (bullion broker) 135, 144 n54 Plessis, A. ; Banque de France 100; Paris Mint 43 Poisat, M. B. 91, 138, 151, 233 Poisat, Michel Benoît, House of Rothschild 133–4 political economy, and end of bimetallism 178–9, 189–93 Portalis, Jean-Baptiste Harold 142 Portugal ; adopts gold 157–8; gold bloc 6 price levels, purchasing power parities hypothesis 167–8

317

prices ; rise in farm 93; stability of 6–7, 189 Prince-Smith, J. 182 Prussia 198 Pupin, René 77; method for estimating specie stock 82–3, 225–6 purchasing power parities hypothesis 167–8 Pyrénées-Atlantiques 38 Raphaël, Berend & Co. 131 n9, 134 Rastel, G. and bimetallism 10 Redish, Angela 185–6 reﬁning industry 132–6 regional development, and gold for silver substitution 38 regions ; effective bimetallism 44–5; gold and silver circulation 45–6, 47–8; interregional trade 93 n33; specie stock 80, 81 reglé conjointe (chain rule), global arbitrage 129–30 Reis, Jaime 116 reserve swaps, Banque de France 112–13 Ricardo, David ; relative price effects 164; variable parity 54 Rothschild, Alphonse de 133, 151, 152, 161 n10; bimetallism 233

318

INDEX

Rothschild, Anthony de 135 Rothschild, Charles 113 n27, 119 n45 Rothschild, James de 134 Rothschild, N. M. 43, 135, 144, 150 Rothschild Fréres 119, 120, 130, 131, 142, 143 n51, 150 Rothschilds 39, 40, 123, 125, 126, 131; arbitrage networks 143–50; coin-minting 139–41; Geld und Silber letters 144–5; Mint Vouchers 43; Paris Mint 139–41, 142; reﬁning 132–5; reserve swaps 113; Strasbourg mint 142–3 Rouen mint 136, 139 Rouland, Governor 102, 124–5, 127, 2–7 n63, 208 Royal Commission on International Coinage 195, 234 Royal Mint 135; buying gold 5 n11 Royal Statistical Society 78 Russell, H. B. 183 Saint-André, Joseph Gadala 133, 134 Saint-Marc, M. 75, 77, 91, 92 Saint-Paul, bullion processing 133 Say, Jean-Baptiste, gold–silver exchange ratios 16 Say, Léon 17 n5, 198, 199, 200, 204–5, 208 Sayers, R. S. 99, 165; prices and inﬂation differentials 164 Scandinavia, and ‘silver bloc’ 6 Schneider (industrialist) 192 Schumpeter, J. and bimetallism 10 Schwartz, Anna 1 Selgin, G. 186 serendipity 176 n1 Seyd, Ernest 36, 61, 102 n11, 217; brokerage fees 41; double evaluation 55; gold–silver points 32–4; London reﬁners 135; Mint Vouchers 43; reﬁning 132; wear and tear of metals 42 silver ; abandonment of 176; Asian demand 160–2; Banque de France's purchases 114–15, 116, 117–18; coin chronology 84–7; demonetization 196–7, 202–3; depreciation of 180–1, 189; effect of increased production 181, 185; exports 160–2, 172; fall in prices 177; ﬂows and monetary equilibrium 172–3; free international circulation 3; increased production and end of bimetallism 179–81; inﬂation 164, 189; limitations on minting 87, 93–4, 199, 202; minting suspended 177; rate of wear 42, 220–1; substitution by gold 35–8, 172–3, 182–3; suspension of minting 206, 207–8; transportation costs 40–1; twin functions 16; uses of 16, 17 silver bloc 6; imports from 158; trade surpluses 160 Silver Drain 168, 172 silver points 59, 61–3; arbitrated pars 58; exchange rate 63–70, 71, 73 Silver Standard ; bimetallic equilibria 22; effective 11–12, 27, 28–9; India 50 n4; Michel Chevalier 157 Soetbeer, A. ; latent reserves 3 n9; on silver 2 Sourdis (banker) 233

Southampton 36 specie ; Banque de France's purchases 113–24, 124–5; ﬂows of 73; holdings 3–4, 93; import and export points 53; quasi-nationalization 175; reduced need and bimetallism 175; role of 2–3; transfer 129; Western supplies of 3–4 specie policy, Banque de France 114–15 specie stock ; comparative estimates 90; controlling 200–2; currency demographics and estimating 84–8; Denuc's method for estimating 83; estimating 76–7; Foville's method for estimating 77–81; increasing 163; model for estimating 88–90, 222–5; Pupin's method for estimating 82–3, 225–6; regional variations 80, 81; trends in (1840–78) 90–4; variations 75 statistics, unreliability of 65 n37, 83 steam press ; minting industry 138; quality 186

INDEX

Strasbourg mint 136, 142, 149, 151; the Rothschilds 142 strategic externalities 196 strategic unsustainability theory, and end of bimetallism 178, 181–5 Suez Canal 146 n59 switching costs 176, 196 Switzerland 188, 192, 195, 206; abandons gold 157; bimetallic bloc 6; limits on silver coining 177; specie holdings 4 Tate, W. 130 Taussig, F. W. 197 Thénard, Baron 133 n17, 136, 139 n41 Theogony 2 Thiers Rente 86–7 Thonnelier steam press 138, 186 Thuillier, Guy 86; bimetallism 10 trade 129–30; bullion movements 159–60; expansion in 92–3; gold and silver circulation 48; interregional 48, 93 n33; specie ﬂows 160 trade balances, exogenous inter-zone 159 transaction costs 193 transactions cost theory, and end of bimetallism 178, 185–9 transfer specie 129 transportation, and arbitrage costs 40–1 Turkey, and ‘gold bloc’ 6 United Kingdom ; currency reform 195–6; gold bloc 6; monetary relations with France 49–52; overstated role of 1–2; specie holding 3–4, 78, 93 United States 188; bimetallic bloc 6; bimetallism controversy 10; Civil War 161; silver 176, 189–91; specie holdings 3–4 universal currency 78, 193 usury laws 116 Vernes, Regent 120, 125 Viner, J. on international monetary system 3 Walras, Léon ; bimetallism 9–10; gold–silver ratios 21–3; scientiﬁc bimetallism 17 Walras's Law 25 wealth, relative 165 Weber, E. J. transport difﬁculties 41 n21 Wicksell, Knut, reduction in specie 175, 214 Willis, H. P. 127 n63, 130 n8; bimetallism and Banque de France 101 Wolowski, L. 9, 198; scientiﬁc bimetallism 17–18 Yeager, L. B. 188; bimetallic system 8

319