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By Root 330 0

is comparable to that of the exchange rates between currencies under a strict gold standard. The legally specified specie contents of the national currencies define a par exchange rate (for example, from 1879 to 1914, $4.86649 ... for one British pound).† If the market exchange rate deviates from par, there is opportunity for arbitrage by exchanging the cheaper currency for gold, shipping the gold to the other country, converting the gold into the other currency, and converting the proceeds into the cheaper currency on the market. For the arbitrage to be profitable, the difference between the market exchange rate and par must be large enough to cover the costs of insurance, shipping the gold, and any other expenses. The par exchange rate plus or minus these costs defines the so-called gold points between which the market exchange rate can fluctuate without shipment of gold in either direction.

In precisely parallel fashion, under a bimetallic standard costs are incurred in converting the undervalued coins into specie and selling the specie on the market. These costs define the upper and lower gold-silver price ratio points between which the market ratio can vary without producing the complete replacement of one metal by the other. The width of the range depends on the seignorage charge, the cost of melting coins, insurance fees, delays and the associated loss of interest, and so on.*

France's bimetallic standard ended when it did because of the Franco-Prussian War of 1870–71. France suffered a devastating defeat and was forced to pay Germany a huge war indemnity in funds convertible to gold. Germany used the money to finance its own shift from a silver standard to a gold standard—a tribute to the example of Britain, which German leaders desperately wanted to surpass in economic power and which had been on gold since 1821. In the process, Germany also dumped on the market large quantities of silver that was withdrawn from circulation: France was not willing to accept the major inflation (in terms of silver) that would have been produced by the combined effect of the drain of gold and the flood of silver. Accordingly, France closed its mints to the free coinage of silver and subsequently adopted a gold standard.*

A remarkable feature of the French experience under bimetallism is that "through twenty years of war, at times against half Europe, [Napoleon] never once allowed a re-sort to the delusive expedient of inconvertible paper money" (Walker 1896b, p. 87). That was almost certainly a tribute to the cautionary example of the assignat hyperinflation (White 1896) that had helped bring Napoleon to power, rather than to any peculiar virtue of bimetallism over monometallism. After the assignat experience, any attempt by Napoleon to issue inconvertible paper money on the promise of returning to specie payments would have had no credibility, and there would have been a large-scale flight from the currency. To the best of my knowledge, no other major war has ever been conducted without resort to depreciation of the currency (in earlier times, by adulterating the currency, changing the nominal value of the coinage, and similar expedients; in recent centuries, by suspending specie payments and resorting to inconvertible paper money). France's behavior contrasts sharply with that of Britain. Britain, which had been on a legal bimetallic but a de facto gold standard, ended specie payments in 1797 and did not resume them until 1821. Its promise to return to specie payments had credibility, however, because of the long earlier period during which a specie standard had prevailed.

During the 1870s, not only Germany and France but many other countries shifted from bimetallism to gold, culminating in the U.S. resumption in 1879. The effect was a rapid fall and wide fluctuations in the market price of silver relative to gold, so that the market gold-silver price ratio had nearly doubled by 1896, when Bryan gave his famous "Cross of Gold" speech and made 16 to 1 his battle cry.

In chapter 4, I have estimated the hypothetical U.S. price