Published by EH.NET (December 2006)

Marc Flandreau The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848-1873. New York: Oxford University Press, 2004. xxiii + 319 pp. $125 (cloth), ISBN: 0-19-925786-8.

Reviewed for EH.NET by Pierre Sicsic, Bank of France.

This is a gem of a book. Marc Flandreau’s rewritten published dissertation, L’or du Monde, explains how the bimetallic system was much more stable than is usually thought, and that it helped to buffer the shock of gold discovery in 1848 (meaning in that instance limiting inflation). Its eventual demise in 1873 was not the result of any economic cause (excess supply of silver, or efficiency gain of some kind), but of the French decision to try to impede the smooth German transition to a gold standard. Throughout the book Flandreau does not pull his punches, making clear his many disagreements with previous scholars.

The introduction makes the very important point that France in the mid century was a very large country in terms of specie holdings (45 percent of its seven-country sample). Then a general equilibrium model is set up in Chapter 1 with four demands: monetary and non-monetary demands for gold and silver. It is shown that there is a range of indeterminate bimetallic equilibria, and therefore that there is no knife-edge instability in a bimetallic system, provided one was lucky enough not to set the official silver/gold price outside of the equilibria range.

Chapter 2 shows that gold and silver circulated together in France, if not in Paris, using the specie surveys (Chapter 4 deals with the same issue by estimating France’s specie holdings from 1840 to 1878). France was not in a de facto gold standard after 1848. In the same chapter, using the Rothschild archives, internal arbitrage gold-silver points are computed. Together with the market price in Paris, they are consistent with some silver remaining in circulation in some parts of the country. This is economic history at its best. First show that some interesting outcome is theoretically possible, then show first that it actually happened and second explain how it made empirical sense that it did happen. Chapter 3 shows that silver was exported and gold imported into France and examines the economics of the exchange rate.

Chapter 5 looks at the Banque de France’s policy of purchasing gold and making payments in silver, and concludes that this policy was merely “surfing on a market wave” – that is following market signals. Chapter 6 depicts the business plan of the old Haute Banque (Rothschild), which involved arbitrage between markets (Paris and London), as well as trading in local markets and the industrial activity of minting.

Chapter 7 starts by quoting inflationary fears in the mid 1850s after the gold finds in California and Australia. Then it explains that the net goods exports had to balance the specie flows, and that the goods flows are consistent with a wealth effect enriching people from countries were gold was found. The model of Chapter 1 is then estimated with France monetary holdings and world stocks of the two metals. The “lost secret” of bimetallism’s stability shows up in the variables used for this estimation. There was a sustained production of silver, 5 billion francs vs. 12 billion francs of gold were mined in the twenty years up to 1870, while the gold stock held in France increased from 1 to 6 billion francs and the silver stock decreased from 2.5 to 1 billion francs. Bimetallism was indeed a remarkably supple system.

Why then did bimetallism come to an end? Chapter 8 looks at the usual explanations. Using simulations of his model, Flandreau dismisses the excess supply of silver – even after the German shift to gold. German holdings in silver were 1.9 billion francs. The sound money view according to which gold standard was less inflationary than bimetallism is dismissed because of anachronism: in the mid-nineteenth century, the gold standard was inflationary. Finally the transaction cost argument is refuted because small change was indeed provided by coins with a lower silver content, and because the freight and insurance cost of bullion shipment was linked to the value and not to the weight of the shipment.

France decided to demonetize silver to bother Germany, which had to unload its silver when it adopted of the gold standard. Germany’s adoption was made possible by the 5 billion franc war indemnity paid in international bills, most of them convertible into gold. In this coordination problem (i.e., Franco-German rivalry) lies the reason of the accidental demise of bimetallism. At this junction one would like to be told why Germany decided to shift to the gold standard.

Two points are made in the conclusion. The first one is that global financial integration existed much before the gold standard. This is true for co-movements of interest rates and bullion flows. This is not as true for financial flows. The second one is that the gold standard enabled concentration of bullion holdings in central banks. Thus the primary responsibility for managing the global monetary system was taken away from private concerns (the “market”). It opened the way to the nationalization of money, and macroeconomic rules became essential: “the question revolved on the ‘credibility’ of monetary institutions, which boiled down to making sure that they behaved as though the did not exist.” In the end Flandreau concludes that the gold standard was modern, even though private arbitrages under bimetallism were pretty sophisticated, because it opened the way to macroeconomic monetary policy, and was bound to give way to managed currency.

I have a slight disagreement with Flandreau about his criticism of the fundamentals theory of the end of bimetallism. While I am convinced that bimetallism could have been maintained in France (and in the U.S.) in 1873, I think the fundamentals theory would have eventually led to its end at a 15.5 (or 16) to 1 relative price after 1890. It would be interesting to keep simulating the model used in the book with metal output up to 1895. Moreover, as stated in chapter 1, monetary demand depends on the expected purchasing power of the specie balances. Therefore, an expected surge of silver mining might lead to an expected loss of purchasing power of silver, and decline in silver money demand. With perfect foresight, bimetallism breaks down as soon as the silver output surge is expected.

Finally, after reading The Glitter of Gold I went back to the famous “crime of 1873” counterfactual by Milton Friedman. I now believe that the most relevant counterfactual is that the U.S. and France would have remained on bimetallism, for less than twenty years. Then the “sophisticated” simulation with the silver price going down to 23.7 is much less likely than the 16 to 1 simulation. I find it interesting that the deflation in this (likely) simulation also provided by Friedman is very close to the actual deflation, while it disappears in the “sophisticated” simulation.

Everyone interested in monetary history or in mid-nineteenth century French economic history should read Marc Flandreau’s book. If in a hurry and with some prior knowledge of the bimetallic issues, read the first two chapters, jump to Chapter 7 parts 3 to 5, and then to Chapter 8 part 2 and the conclusion.

Pierre Sicsic, who is director of the Balance of Payments in the Bank of France, is the author (with Pierre-Cyrille Hautcoeur) of “Threat of a Capital Levy, Expected Devaluation and Interest Rates in France during the Interwar Period,” European Review of Economic History, 1999.