Money Mischief_ Episodes in Monetary History - Milton Friedman [29]
Which Would Have Been Better: Silver or Gold?
Given that either extreme would have been preferable to the uneasy compromise, which extreme would have been better: the early adoption of silver as the single standard at the monetary value of $1.2929 ... an ounce, or the early commitment to gold as the single standard? Or, seemingly a third choice between the extremes, the continuation of nominal bimetallism? An answer requires a thorough examination of the quantitative consequences of the three choices.
As it happens, that examination, presented in chapter 4, makes it clear that resumption under a continuation of the bimetallic standard would have been to silver, not to gold, and would have occurred in 1876, a year after the passage of the Resumption Act. As a result, the gold-silver price ratio would have behaved very differently than it did.
Figure 2
Gold-Silver Price Ratio: Legal, Actual, and Hypothetical, 1865–1914
Figure 2 plots the legal gold-silver price ratio (16 to 1), the actual market price ratio, and an estimate of the hypothetical price ratio that would have prevailed if legal bimetallism had continued. The actual ratio skyrocketed, especially after 1890, when it rose to more than 30 and stayed there. In sharp contrast, the estimated hypothetical ratio departs widely from the legal ratio only between 1891 and 1904. Before 1891, it fluctuates narrowly around the 16 to 1 ratio. From 1906 to 1913, it remains between 17 and 18. The years during which the ratio departs widely from 16 to 1 are not the result of chance. The ratio's rise to well above 16 to 1 comes during the years of maximum political agitation about free silver surrounding the Bryan free-silver campaign of 1896 and the subsequent unwinding of the effects of that agitation. If the critical line about silver had been retained in the Coinage Act of 1873, that agitation would never have occurred, because the United States would have been on a silver standard. The hypothetical price ratio falls to a lower level during the period when world gold production, which started rising rapidly in 1897, reached peak levels, tending to depress the real price of gold.
These estimates allow (as fully as I could) for the changed economic circumstances that would have followed the continuation of legal bimetallism—the higher world price level and lower real price of gold, the reduction in the amount of silver available for nonmonetary use, and so on. But I have not been able to allow for some of the predictable effects, notably changes in real income and in the production of silver and gold, let alone for the change in the political climate. No doubt the political vacuum created by the disappearance of the free-silver issue would have been filled by other issues—very likely, pressure for the United States to convert to a gold standard—but there is no way of conjecturing what effect these issues would have had on the gold-silver ratio. Any attempt to do so would carry this exercise in history as it might have been into the realm of fantasy.
My conclusion is that the adoption of silver would in practice have produced ratios throughout the period that would have fluctuated not far from 16 to 1 and that would have varied even less before 1891 and after 1904 than the hypothetical estimates plotted in Figure 2. In short, I believe that the United States could have played the same role after 1873 in stabilizing the gold-silver price ratio that France did before 1873.* If I am right, the fears of the opponents of bimetallism that a bimetallic standard would involve continual shifting between silver