International monetary economics of the nineteenth century is not my strong point, so does anyone here who knows more about it than me want to comment on Marc Flandreau's "The French Crime of 1873: An Essay on the Emergence of the International Gold Standard", Journal of Economic History, Vol. 56, No. 4 (Dec. 1996)? http://www.econ.tcu.edu/quinn/finhist/readings/Flandreau Crime of 1873.pdf (The "Crime of 1873" was of course a term used by Populists to demonize the US decision to demonetize silver in 1873; Flandreau suggests that there was a far more important blow to bimetallism delivered by France that same year.)
Flandreau rejects four conventional explanations for the emergence of the international gold standard in the 1870's. First, the increased production of silver did not make the gold standard inevitable: "the rise was proportionately much smaller than the one that had affected gold after 1848 without determining dramatic changes." Second, Germany's turn to gold in the early 1870's was not in itself decisive: "France would have been able to buffer the impact of Germany's move to gold so that Germany's reform could not by itself trigger the move away from silver." [1] Third, the argument that silver, being bulkier than gold, was less suitable for international transactions is also dismissed: "it is not true that gold strongly dominated silver as an instrument for international transactions." Fourth, the explanation that the bourgeoisie/creditor class as the dominant class in Europe favored the gold standard as a guaranty of stability reads later developments into the early 1870's: "before 1873 the political support in favor of gold was much less homogeneous than what is commonly believed: as a creditor-debtor opposition, it developed after the emergence of the gold standard, not before."
Indeed, Flandreau argues, "far from being preordained for structural, technological, or political reasons, the making of the gold standard was an accident of history." After 1870, the Franco-Prussian War gave Germany the resources necessary to switch to the gold standard. "It also planned to get rid of its demonetized silver through the agency of France's bimetallic system, which had so far acted as a stabilizer of the international monetary system. The French retaliated in suspending silver coinage in an attempt to block Germany's move to gold. But the bulk of legislation adopted in Germany in the early 1870s prohibited such a reversal, and France's decision only provoked the world's flight away from silver. In other words, the emergence of the gold standard was a blatant failure of international cooperation...
"...The collapse of bimetallism after Germany moved to gold was avoidable provided that France be induced to maintain unlimited silver coinage. Does that mean that there was a French crime of 1873, of much more dramatic consequences than the American one? Indeed, French policymakers seemed to underrate the fact that their actions would undermine the credibility of their commitment to bimetallism. Likewise, they clearly overlooked that their moves, by leading to the demise of silver, would have deflationary consequences. However, this was not perceived by the Germans, either. For had German authorities realized it, they should have stepped back, instead of going further. But in the fight for gold that developed in the early 1870s, staying pegged to gold became a matter of national pride. Thus there was a French crime of 1873, but there was a German crime, too..."
So--assuming Flandreau is right--suppose the French realize that their decision to suspend silver coinage will *not* block Germany's move to gold, and *will* undermine bimetallism internationally--and they decide not to do it? (Of course avoiding the Franco-Prussian War could also avoid the switch to the gold standard, but I would prefer not to use that as the POD, because it would have so many other effects.) Effects on the deflation of 1873-1896? (It should be noted that deflation and depression are not necessarily synonymous. In the US there were serious depressions in 1873- 75 and 1893-96 and some lesser depressions in between, but overall the 1873-96 period was one of economic growth.)
There will also of course be effects on the debate on monetary policy in the US, not just because of the effects of less deflation in Europe on the US economy, but also because a common argument used by opponents of free silver here was that almost all the civilized nations of the earth used the gold standard.
[1] What about the French indemnity to Germany after the Franco-Prussian War? Flandreau writes, "...Was French bimetallism strong enough to buffer Germany's reform? The implicit assumption of the strategical theory is that the transfer of five billion francs in gold from France to Germany combined with the sale on international markets of about two billion francs in silver would have forced the French economy on a de facto silver standard.
"This view, however, is flawed by a number of historical and analytical inaccuracies. Contrary to a common belief, the French indemnity was not paid in specie.26 The French government issued a perpetual bond--the so-called *Rente Thiers*--which was subscribed not only by French investors but by foreigners as well. With the proceeds of that operation, it obtained short-term bills on various places (London, Hamburg, Amsterdam, and so on). The bills were then transferred to Germany. A mere 500 million French francs were paid in specie (of which 250 million was in silver). The German government, on the other hand, used a fraction of the bills (less than one-fifth) to obtain gold.27 Germany was counting on sales of its silver holdings to complete its move to gold. Hence the monetary consequences of the indemnity as a shock on bullion markets were likely to be far more limited than usually suggested." (pp. 873-874)
Flandreau rejects four conventional explanations for the emergence of the international gold standard in the 1870's. First, the increased production of silver did not make the gold standard inevitable: "the rise was proportionately much smaller than the one that had affected gold after 1848 without determining dramatic changes." Second, Germany's turn to gold in the early 1870's was not in itself decisive: "France would have been able to buffer the impact of Germany's move to gold so that Germany's reform could not by itself trigger the move away from silver." [1] Third, the argument that silver, being bulkier than gold, was less suitable for international transactions is also dismissed: "it is not true that gold strongly dominated silver as an instrument for international transactions." Fourth, the explanation that the bourgeoisie/creditor class as the dominant class in Europe favored the gold standard as a guaranty of stability reads later developments into the early 1870's: "before 1873 the political support in favor of gold was much less homogeneous than what is commonly believed: as a creditor-debtor opposition, it developed after the emergence of the gold standard, not before."
Indeed, Flandreau argues, "far from being preordained for structural, technological, or political reasons, the making of the gold standard was an accident of history." After 1870, the Franco-Prussian War gave Germany the resources necessary to switch to the gold standard. "It also planned to get rid of its demonetized silver through the agency of France's bimetallic system, which had so far acted as a stabilizer of the international monetary system. The French retaliated in suspending silver coinage in an attempt to block Germany's move to gold. But the bulk of legislation adopted in Germany in the early 1870s prohibited such a reversal, and France's decision only provoked the world's flight away from silver. In other words, the emergence of the gold standard was a blatant failure of international cooperation...
"...The collapse of bimetallism after Germany moved to gold was avoidable provided that France be induced to maintain unlimited silver coinage. Does that mean that there was a French crime of 1873, of much more dramatic consequences than the American one? Indeed, French policymakers seemed to underrate the fact that their actions would undermine the credibility of their commitment to bimetallism. Likewise, they clearly overlooked that their moves, by leading to the demise of silver, would have deflationary consequences. However, this was not perceived by the Germans, either. For had German authorities realized it, they should have stepped back, instead of going further. But in the fight for gold that developed in the early 1870s, staying pegged to gold became a matter of national pride. Thus there was a French crime of 1873, but there was a German crime, too..."
So--assuming Flandreau is right--suppose the French realize that their decision to suspend silver coinage will *not* block Germany's move to gold, and *will* undermine bimetallism internationally--and they decide not to do it? (Of course avoiding the Franco-Prussian War could also avoid the switch to the gold standard, but I would prefer not to use that as the POD, because it would have so many other effects.) Effects on the deflation of 1873-1896? (It should be noted that deflation and depression are not necessarily synonymous. In the US there were serious depressions in 1873- 75 and 1893-96 and some lesser depressions in between, but overall the 1873-96 period was one of economic growth.)
There will also of course be effects on the debate on monetary policy in the US, not just because of the effects of less deflation in Europe on the US economy, but also because a common argument used by opponents of free silver here was that almost all the civilized nations of the earth used the gold standard.
[1] What about the French indemnity to Germany after the Franco-Prussian War? Flandreau writes, "...Was French bimetallism strong enough to buffer Germany's reform? The implicit assumption of the strategical theory is that the transfer of five billion francs in gold from France to Germany combined with the sale on international markets of about two billion francs in silver would have forced the French economy on a de facto silver standard.
"This view, however, is flawed by a number of historical and analytical inaccuracies. Contrary to a common belief, the French indemnity was not paid in specie.26 The French government issued a perpetual bond--the so-called *Rente Thiers*--which was subscribed not only by French investors but by foreigners as well. With the proceeds of that operation, it obtained short-term bills on various places (London, Hamburg, Amsterdam, and so on). The bills were then transferred to Germany. A mere 500 million French francs were paid in specie (of which 250 million was in silver). The German government, on the other hand, used a fraction of the bills (less than one-fifth) to obtain gold.27 Germany was counting on sales of its silver holdings to complete its move to gold. Hence the monetary consequences of the indemnity as a shock on bullion markets were likely to be far more limited than usually suggested." (pp. 873-874)