May the Worst Commodity Standard be the Best? A Re-enactment of "The Crimes of 1873"

This paper establishes new existence and welfare results for the Kiyotaki-Wright model [1989] considering mixed strategies that do not restrict agents to play a unique strategy for each opportunity set. For a general version of the model, I construct many stable equilibria in which goods with poor storage properties are widely accepted while better goods are less accepted. Furthermore, I show that these equilibria may be socially desirable because more trade occurs that in the alternative equilibria in which better goods are those which are widely accepted. The nontechnical intuition is that if intrinsically attractive objects have great acceptance, people would be very reluctant to trade them away. In contrast, if intrinsically unattractive objects are the objects that are widely accepted, people would be less reluctant to trade them away and, consequently, more trade may occur. By analogy, those results may be helpful in analyzing historical episodes in which a society faced the choice of a commodity standard; say, the election between a gold standard and a silver standard. For instance, my welfare results may help us to evaluate the controversial rush after 1867 to adopt the gold standard, the appreciating standard, by the great commercial nations of the time. In fact, we may have a reconstruction in a general equilibrium model of the so-called crimes of 1873 in US and France (see Friedman [1990 b] and Flandreau [1996]). That is, my results may suggest that keeping (as in China, India, Mexico, etc.) the silver standard, the depreciating standard, was a sound economic policy decision as discussed for some protagonists. Therefore, we may have some support to the alleged claim of some silver advocates that the "worst standard was the best;" that is, perhaps with more precision, that the intrinsically worst commodity standard may be the socially best one.