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Was the Emergence of the International Gold Standard Expected?Melodramatic Evidence from Indian Government Securities

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  • Marc Flandreau
  • Kim Oosterlinck

Abstract

The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 11-001.

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Length: 37 p.
Date of creation: Jan 2011
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Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/73511

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Keywords: Exchange rate regime; gold standard; bimetallism; credibility; silver risk;

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  1. Flandreau, Marc R, 2002. ""Water Seeks a Level": Modeling Bimetallic Exchange Rates and the Bimetallic Band," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 491-519, May.
  2. Michael D Bordo & Christopher M Meissner & Marc D Weidenmier, 2006. "Currency Mismatches, Default Risk, and Exchange Rate Depreciation: Evidence from the End of Bimetallism," WEF Working Papers 0010, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  3. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
  4. Flandreau, Marc, 1996. "The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870–1880," The Journal of Economic History, Cambridge University Press, vol. 56(04), pages 862-897, December.
  5. Marc Flandreau & Clemens Jobst, 2009. "The Empirics of International Currencies: Network Externalities, History and Persistence," Economic Journal, Royal Economic Society, vol. 119(537), pages 643-664, 04.
  6. Yohei Okawa & Eric van Wincoop, 2010. "Gravity in International Finance," Working Papers 072010, Hong Kong Institute for Monetary Research.
  7. Gallarotti, Guilio M., 1995. "The Anatomy of an International Monetary Regime: The Classical Gold Standard 1880-1914," OUP Catalogue, Oxford University Press, number 9780195089905, February.
  8. Barry J. Eichengreen & Richard Portes, 1986. "Debt and Default in the 1930s: Causes and Consequences," NBER Working Papers 1772, National Bureau of Economic Research, Inc.
  9. Eichengreen, Barry & Flandreau, Marc, 1996. "Blocs, Zones and Bands: International Monetary History in Light of Recent Theoretical Developments," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(4), pages 398-418, September.
  10. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1, July.
  11. Ron Alquist & Ben Chabot, 2010. "Did adhering to the gold standard reduce the cost of capital?," Working Paper Series WP-2010-13, Federal Reserve Bank of Chicago.
  12. Kim Oosterlinck, 2003. "The Bond Market and the Legitimacy of Vichy France," Working Papers CEB 03-003.RS, ULB -- Universite Libre de Bruxelles.
  13. Redish,Angela, 2006. "Bimetallism," Cambridge Books, Cambridge University Press, number 9780521028936.
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  15. Flandreau, Marc, 1995. "An Essay on the Emergence of the International Gold Standard, 1870-80," CEPR Discussion Papers 1210, C.E.P.R. Discussion Papers.
  16. Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
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  18. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
  19. Willard, Kristen L & Guinnane, Timothy W & Rosen, Harvey S, 1996. "Turning Points in the Civil War: Views from the Greenback Market," American Economic Review, American Economic Association, vol. 86(4), pages 1001-18, September.
  20. Asaf Zussman & Noam Zussman & Morten Orregaard Nielsen, 2008. "Asset Market Perspectives on the Israeli-Palestinian Conflict," Economica, London School of Economics and Political Science, vol. 75(297), pages 84-115, 02.
  21. Marc D. Weidenmier, . "Turning Points during the U.S. Civil War: Views from the Grayback Market," Claremont Colleges Working Papers 1999-24, Claremont Colleges.
  22. Olivier Accominotti & Marc Flandreau & Riad Rezzik, 2011. "The spread of empire: Clio and the measurement of colonial borrowing costs," Economic History Review, Economic History Society, vol. 64(2), pages 385-407, 05.
  23. Richard Sicotte & Catalina Vizcarra & Kirsten Wandschneider, 2010. "Military conquest and sovereign debt: Chile, Peru and the London bond market, 1876–1890," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 4(3), pages 293-319, October.
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  27. Flandreau, Marc, 2004. "The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard, 1848-1873," OUP Catalogue, Oxford University Press, number 9780199257867, February.
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  29. Einaudi, Luca, 2001. "Money and Politics: European Monetary Unification and the International Gold Standard (1865-1873)," OUP Catalogue, Oxford University Press, number 9780199243662, February.
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