Money Mischief_ Episodes in Monetary History - Milton Friedman [56]
Why did Britain adopt a monometallic standard instead of returning to its earlier bimetallism? And why gold instead of silver? In a recent paper, Angela Redish states: "The historical literature has typically explained the emergence of the gold standard as a matter of happenstance: the legislation of 1816 merely ratified the de facto gold standard that had existed in England since Newton's 'inadvertent' overvaluation of gold at the beginning of the eighteenth century" (1990, pp. 789–90). Redish disagrees, concluding (p. 805) that "England abandoned bimetallism in 1816 because a gold standard with a complementary token silver coinage offered the possibility of a medium of exchange with high and low denomination coins circulating concurrently. The gold standard succeeded because the new technology employed by the Mint was able to make [gold and token silver] coins that counterfeiters could not copy cheaply and because the Mint accepted the responsibility of guaranteeing the convertibility of the tokens."
The currency system Redish describes was indeed one consequence of the monetary reform. As Feavearyear (1963, p. 226) put it: "Peel's Act had left the pound upon a basis which approached more nearly to a completely automatic metallic standard than at any other time before or since. The seignorage and other mint charges had long been abolished.... [T]he introduction of improved machinery into the Mint, together with the growth of a more efficient organization for the detection of crime, was beginning to defeat the counterfeiter. Gold was more difficult to counterfeit than silver."
However, I believe that achieving a satisfactory silver token coinage would not have been a valid reason for returning to gold rather than silver even though it clearly was a consequence of that monetary reform and may have been a partial cause for its adoption. Under France's successful bimetallic system, high and low denomination full-bodied coins circulated simultaneously for seventy-five years, though the proportion between the two metals in circulation changed from time to time. Redish rejects the possibility that high and low denomination coins could long circulate concurrently because she implicitly regards the legal ratio as a knife-edge, requiring either frequent recoinage or changes in the nominal value of coins or shifts between alternate standards. But the experience of France indicates that there is a range of tolerance around the legal bimetallic ratio wide enough to absorb minor changes in the market ratio without difficulty. It also indicates that the adoption of a single legal ratio by one or more major financial powers has a significant stabilizing influence on the market ratio. The difficulty that Britain had in maintaining a dual standard earlier, and that the United States had then and later, arose because both countries set the legal ratio at a different level than France's, at a time when the French ratio dominated the market ratio.
Personally, I share Frank Fetter's judgment (1973, p. 16) that "With the hindsight of history, it is amazing that a decision of such importance for England [the adoption of a single gold standard], and by England's example for an entire world, should have been made without benefit of full analysis, and largely on the basis of details of small coin convenience, and not on larger issues of economic policy. Thus was formally established the gold standard which became effective with the resumption of cash payments in 1821 and survived for 93 years."*
Redish's explanation of why gold was adopted rather than silver echoes Jevons: under a silver standard, high-value coins would be excessively heavy and inconvenient. Gold could have been used for high-value transactions, but if gold coins were minted with a face value less than their market value, they would not have circulated at par. If the face value exceeded the market