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By Root 314 0

and gold would have proved false. With the United States effectively on silver and the United Kingdom and other major countries on gold, changes in the gold-silver ratio would have been directly reflected in the exchange rate between the dollar and other currencies. A rise in the ratio would have produced a dollar depreciation, a decline in the ratio a dollar appreciation. Here again, a relatively steady gold-silver ratio would have meant relatively steady exchange rates—varying for sterling not far from the level of $4.86 that actually prevailed. (These issues are considered in greater detail in chapter 6.)

The gold-silver price ratio is of no great importance in and of itself—except to gold and silver dealers—but it is vitally important for the price levels that would have prevailed in the silver-standard countries (by assumption, including the United States) and in the gold-standard countries. Figure 3 plots the actual U.S. price level and alternative hypothetical price levels corresponding to the gold-silver price ratios in Figure 2. The naive estimate simply assumes that the gold-silver price ratio and the real price of silver would have been what they actually were. On that assumption the price level is readily calculated. It is necessary only to multiply the price level that actually prevailed by the ratio of the legal price of silver ($1.2929) to the market price. However, this naive estimate clearly produces a great overestimate of the price rise that would have occurred. The 16 to 1 estimate goes to the other extreme; it underestimates the effect on the price level of the adoption of a silver standard by assuming that the actual ratio would have been precisely 16 to 1 throughout. The hypothetical estimate is in between these two, but for most of the period is considerably closer to the 16 to 1 estimate than to the naive estimate. However, the 16 to 1 estimate probably gives a more accurate picture of the likely year-to-year pattern than either of the other estimates do. Both the naive and the hypothetical estimates are bedeviled by purely statistical "noise." In addition, U.S. bimetallism would have provided an incentive for worldwide stabilizing speculation in silver that would have eliminated erratic movements.

Figure 3

U.S. Price Level: Actual and Alternatives under Silver Standard, 1865–1914

The actual price level in the United States fell at a rate of 1.5 percent a year from 1876 to 1896 and then rose at a rate of 2.0 percent a year until 1914. The 16 to 1 price level first falls by 0.7 percent a year to 1896 and then rises by 2.3 percent a year to 1914. The hypothetical price level falls at a rate of 0.2 percent a year from 1876 to 1887 and then rises at the rate of 1.1 percent a year to 1914. Either alternative would have cut the initial rate of decline in half. The 16 to 1 alternative implies a slightly more rapid subsequent rise, the hypothetical alternative a much milder rise. If my estimates are anywhere near correct, a bimetallic standard—really a silver standard—would have produced a considerably steadier price level than did the gold standard that was adopted.

In addition, a silver standard almost surely would have avoided what Anna Schwartz and I, in our Monetary History, dubbed "the disturbed years from 1891 to 1897" (1963, p. 104)—years that encompassed the very sharp contraction of 1892 to 1894, a brief and mild recovery from 1894 to 1895, another contraction from 1895 to 1896,* widespread bank failures plus a banking panic in 1893, and a run on U.S. gold reserves by foreigners fearful that silver agitation would force the United States off the gold standard. Confidence was restored and a departure from gold prevented by a private syndicate headed by J. P. Morgan and August Belmont, under contract to the U.S. Treasury. "The allegedly onerous terms of the contract, arranged secretly through agents long identified in Populist literature as 'the conspiracy of international bankers,' became an issue in the campaign of 1896" (Friedman and Schwartz 1963, p. 112n.).

Figure 4

U.K. Price Level: