Money Mischief_ Episodes in Monetary History - Milton Friedman [44]
But this is a judgment about 1873, when the Coinage Act was passed, or about 1879, when resumption on the basis of gold occurred. By 1896, was it not too late to undo the damage? Wasn't Bryan trying to close the barn door after the horse had been stolen? Although the reasoning I have attributed to the financial community is naive, I believe that the fundamental conclusion was correct. A measure that would have been of great benefit to both the United States and the rest of the world in 1873 would have done great harm to both after 1896, in part precisely because it was not adopted in 1873. For reasons developed at some length in chapter 6, I believe that a bimetallic standard is a better monetary standard than a monometallic gold standard. That was true in 1896 as in 1879. However, circumstances do alter cases. Under the changed circumstances of 1896, the gold-silver price ratio at which bimetallism would have been a boon rather than a disaster was a ratio equal to or higher than the then current market ratio, not lower.
Bimetallism at 16 to 1 would have been a boon in 1879 because it would have prevented or eased the deflation threat posed by the widespread shift to gold. Moreover, it would have done this without a discontinuous transition. The market gold-silver price ratio was only a trifle below 16 to 1 in 1873, reached that level by 1875 or 1876, and exceeded it only slightly by 1879, so the transition would have been smooth and prompt.
In 1896 the threat was inflation, not deflation. The flood of gold from South Africa was raising the stock of money in the gold-standard countries, and the only countervailing force this time was the continued increase in output. By 1914, the price level was 17 percent higher in Britain and 44 percent higher in the United States than in 1896. The greater rise in the United States than in Britain reflected the reaction to the greater decline in the early 1890s.
The United States' adoption of bimetallism at a 16 to 1 ratio in 1896 would have sharply increased the demand for silver relative to the demand for goods in general and would have produced an outflow of gold from the United States. The market gold-silver price ratio could not have remained at 30 to 1. It might not have come all the way down to 16 to 1, but even that cannot be entirely ruled out. The calculations in chapter 4 of the hypothetical gold-silver price ratio that would have prevailed if the United States had remained on a legal bimetallic standard suggest that the ratio would have tended to fluctuate around 16 to 1 throughout the period from 1873 to 1914. According to those estimates, the highest ratio would have occurred in 1896, at about 24 to 1. However, I believe that that is very likely an overestimate both of what the ratio would have been under the hypothetical circumstances and of what it would have fallen to if Bryan's monetary program had been enacted.*
Whatever happened to the ratio, the effect would have been to raise the rate of growth of the quantity of money in both the United States, which would have accumulated silver, and in the rest of the world, which would have received the outflow of gold from the United States. Inflation would have been even higher than it actually was. And the transition would have been anything but gradual for the United States. The financial community was right that the immediate result would have been a sharp depreciation in the exchange rate between the dollar and the currencies of the gold-standard countries, a depreciation that would indeed have created great transitional difficulties for the international trade and