Article

A Model of Bimetallism

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Abstract

L'int�r�t de l'approche par les jeux globaux ("global games'') est pr�cis�ment d'ancrer les anticipations sur des variables exog�nes r�elles. On peut ainsi garder l'aspect auto-r�alisateur des anticipations mais en restaurant l'unicit� de l'�quilibre et donc un meilleur pouvoir pr�dictif du mod�le. Nous illustrons ces m�canismes sur deux exemples. Le premier a trait au choix r�sidentiel d'agents qui ont une pr�f�rence "identitaire''. Le second a trait � la contagion de paniques bancaires d'un pays � un autre. De mani�re plus g�n�rale, tous les jeux qui pr�sentent des compl�mentarit�s strat�giques sont susceptibles d'�tre analys�s au moyen des techniques des "global games''. Il convient toutefois de rappeler que les techniques utilis�es demeurent assez sp�cifiques: l'incertitude strat�gique porte essentiellement sur les croyances de premier degr� des autres acteurs. Or, si de mani�re plus g�n�rale on suppose que cette incertitude peut porter sur des ordres plus �lev�s, les conclusions des mod�les peuvent changer. Ainsi, Weinstein et Yildiz (2004) montrent que dans un oligopole de Cournot, il y a une tr�s grande multiplicit� d'�quilibres si on suppose que l'incertitude porte sur les croyances de niveaux suffisamment �lev�s.

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... Mangas (1989, p.316) 188,951 kg more than 7 million pesos in treasure sunken; partly salvaged 1623, Mangas (1989, p.316) 76,345 kg about 3 million pesos sunken 1624Mangas (1989 51,122 kg 2 million pesos sunken 1628 Potter (1972, p.160), Marx (1987, p.248), Mangas (1989, p.316) 30,538 kg around 1.2 million pesos sunken, largely salvaged 1628 Venema (2010, p.213) 80,660 kg 177,000 pounds of silver and 66 pounds of gold captured 1631 Marx (1987, p.424), Morineau (1985, p.242) 58,169 kg more than 2 million pesos sunken; 1 million pesos salvaged 1631 Marx (1987, p.249), Morineau (1985, p.242) 150,241 kg more than 5.5 million pesos sunken; very little salvaged 1634 Sandz and Marx (2001, p.129), Mangas (1989, p.316) 7,635 kg around 300,000 pesos in treasure sunken, partly salvaged 1641 Mangas (1989, p.318) 76,683 kg 3 million pesos sunken 1654 Earle (2007, p.83) 255,610 kg 10 million pesos sunken; 3.5 million pesos recovered 2 1656 Potter (1972, p.432) 173,815 kg 2 million pesos captured; around 5 million pesos sunken 1656 Walton (1994, pp.128, 140) 127,805 kg 5 million pesos sunken, 2.5 million pesos salvaged 1702 Kamen (1966) 7,350 kg around 80,000 pesos captured by British; Dutch capture and sunken metals assumed proportional to ship capture and destruction 1708 Phillips (2007, pp.46,181), Sedgwick (1970) 2 286,283 kg 11 million pesos sunken and 200,000 pesos captured 1711 Potter (1972, p.152), Marx (1987, p.353), Morineau (1985, p.375) 81,585 kg more than 3 million pesos sunken; around 1.5 million pesos salvaged 1715, Morineau (1985, p.375) 308,382 kg 12 million pesos sunken; around 5 million salvaged 1730 Walton (1994, p.166), Morineau (1985, p.375) 138,841 kg more than 5.5 million pesos sunken; partly salvaged 1733 Fine (2006, p.153) 311,908 kg around 12.5 million pesos sunken; almost all salvaged 1750 Putley (2000) The European precious metal stock in 1492 is uncertain. According to Velde and Weber (2000b) when Columbus first voyaged to America the global silver and gold stocks amounted to 3600 tonnes and 297 tonnes respectively. 5 Using the contemporary silvergold rate of 11.1 (Spooner, 1972) we arrive at an initial global precious metal stock of 6897 metric tonnes of silver equivalents. ...
... 12 Note that several other publications have chosen a 1% depreciation rate (Motomura, 1997;Velde and Weber, 2000b). The value of 1%, however, accounts for more varieties of precious metal loss than pure wear, such as losses in transport and loss arising from the balance of trade (Patterson, 1972;Mayhew, 1974). ...
... This ensures that the gold-silver composition of the Spanish money stock stays in line with the supply data. For the initial gold-silver shares we use the 1492 data by Velde and Weber (2000b) described earlier. 17 The inflows account for transportation losses, which in the case of Spain include losses due to piracy. ...
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We exploit a recurring natural experiment to identify the effects of money supply shocks: maritime disasters in the Spanish Empire (1531-1810) that resulted in the loss of substantial amounts of monetary silver. A one percentage point reduction in the money growth rate caused a 1.3% drop in real output that persisted for several years. The empirical evidence highlights nominal rigidities and credit frictions as the primary monetary transmission channels. Our model of the Spanish economy confirms that each of these two channels explain about half of the initial output response, with the credit channel accounting for much of its persistence. JEL Codes: E43, E44, E52, N10, N13
... Our model is closely related to that of Velde and Weber (2000) and Lee, Wallace, and Zhu (2005). Velde and Weber (2000) model a commodity money system allowing agents to hold monetary metal as coins or in a form that yields direct utility. ...
... Our model is closely related to that of Velde and Weber (2000) and Lee, Wallace, and Zhu (2005). Velde and Weber (2000) model a commodity money system allowing agents to hold monetary metal as coins or in a form that yields direct utility. The demand for money in their model is driven by a cash-in-advance constraint. ...
... The way in which we model commodity money follows that used by Velde and Weber (2000). We assume that silver can be held in either of two forms, which we refer to as coins and jewelry. ...
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We construct a random matching model of a monetary economy with commodity money in the form of potentially different types of silver coins that are distinguishable by the quantity of metal they contain. The quantity of silver in the economy is assumed to be fixed, but agents can mint and melt coins. Coins yield no utility, but can be traded. Uncoined silver yields direct utility to the holder. We find that optimal coin size increases with the probability of trade and with the stock of silver. We use these predictions of our model to analyze the coinage decisions of the monetary authorities in medieval Venice and England. Our model provides theoretical support for the view that decisions about coin sizes and types during the medieval period reflected a desire to improve the economic welfare of the general population, not just the desire for seigniorage revenue.
... The adoption of a new monetary system (such as the convertibility of notes into gold by 1880 in all core countries) carries important choices. Velde and Weber (2000) argue that bimetallism is not desirable because, among steady-states, welfare under monometallism is higher than under any bimetallic equilibrium. Domestic political and economic factors affecting the adoption of new monetary systems have been studied by Friedman (1990aFriedman ( , 1990b and Gramm and Gramm (2004) for the United States and by Flandreau (1996) for France, among others. ...
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In this paper I estimate the speed of adjustment to shocks to real effective exchange rates (REERs) during the gold standard years. Adoption of the gold standard by the United States in 1879 resulted in all four core countries (France, Germany, the United Kingdom and the United States) being fully committed to gold. I use the concept of half-life (HL) to measure the time it takes for a deviation from purchasing power parity (PPP) to dissipate by 50%. Relative to the years 1870-1913, between 1880 and 1913 the half-lives of REERs in core countries decrease from between 4.4 and 5.2 years to between 3.1 and 3.4 years, with similar declines across dynamic panels. Combined with evidence elsewhere that interest rates adjusted quickly, the evidence herein suggests that adjustment in goods markets was faster following adoption of the gold standard.
... (2002) build a model with a large coin, which they call a " dollar, " and a small coin, which they call a " penny. " Denomination issues are introduced by assuming that one of the two goods in their model can only be purchased with pennies. In other words, their model has a " penny-in-advance " constraint in addition to the usual budget constraint. Velde and Weber (2000) build a model with gold and silver coins in which agents get direct utility from the uncoined stocks of these metals that they hold. These models are subject to several criticisms about their abilities to analyze the problems with commodity money systems. The Sargent and Velde (2002) and Velde and Weber (2000) models are subject to the ...
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Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving.
... Among the related models of commodity money areKing and Plosser (1986),Velde and Weber (2000), andSussman and Zeira (2003) ...
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This paper provides a theoretical account for the separation of a unit of account from a medium of exchange in the commodity money system and the superiority of …at money as a unit of account as well as a medium of exchange. We incorporate the recognizability of silver as a medium of exchange explicitly into the standard search-based model of exchange where the silver can be either carried into the decentralized market for a pairwise trade or invested in the world market for a given rate of return. When the recognizability problem becomes severe, both the real balance of silver as a medium of exchange and the quantity traded decrease substantially. The declining real balance of silver is due to either a decrease in the price of silver when silver is scarce or a decrease in the nominal balance of silver when silver is abundant. The variability of silver price and silver demand also implies the failure of an imperfectly-recognized medium of exchange to be a stable unit of account due to its liquidity return which is negatively related to its recognizability. An increase in the recognizability of silver improves welfare through its positive e¤ects on the informative single-coincidence meetings, the quantity traded, net of opportunity cost of holding nominal balance of silver for a bilateral trade in the decentralized market. This implies the superiority of …at money which is perfectly recognizable.
... th (1960, 1961,Lucas (1972Lucas ( , 1976,Lucas and Stokey (1983),Lucas and Prescott (1971, 1974),Kydland and Prescott (1977),Hansen and Sargent (1980),Hansen (1982),Sims (1972), Fisher (1926,Friedman and Schwartz (1963), andVelde (2009). Fisher (1926. XI, XII), entitled 'Statistical Verification', set out a road map forFriedman and Schwartz (1963).Velde and Weber (2000) beautifully formalize and extend an enlightening model of bimetallism created byFisher (1926). The issues described in this paper have been with us for a very long time. SeeConklin (1998) for a description and analysis of sovereign debt issues faced by Spain under Phillip II.2 For an exquisite example of how theory imitates life, seeVel ...
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Under the Articles of Confederation, the central government of the United States had limited power to tax. Therefore, large debts accumulated during the US War for Independence traded at deep discounts. That situation framed a US fiscal crisis in the 1780s. A political revolution—for that was what scuttling the Articles of Confederation in favor of the Constitution of the United States of America was—solved the fiscal crisis by transferring authority to levy tariffs from the states to the federal government. The Constitution and acts of the First Congress of the United States in August 1790 gave Congress authority to raise enough revenues to service a big government debt. In 1790, the Congress carried out a comprehensive bailout of state governments’ debts, part of a grand bargain that made creditors of the states become advocates of ample federal taxes. That bailout created expectations about future federal bailouts that a costly episode in the early 1840s proved to be unwarranted.
... ks over more than fifty years of Bimetallism), we consider that limiting the explorations of the influence of discount rate coordination on the Bimetallism stability has been a way of sealing the economic orthodox approach of Bimetallism. Indeed, the orthodox literature on Bimetallism insists on the self equilibrating role of bimetallic mechanisms. Velde and Weber (2000) showed that bimetallism was feasible, sustainable and stable. Oppers (2000) assessed the stabilizing effect of Bimetallism as being similar to that of an exchange rate target zone with bimetallic boundaries playing the role of reflecting barriers and the mint parity the part of absorbing barrier. By applying a monetary approach of the b ...
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Gesell taxes on money have recently received attention as a way of alleviating the zero‐lower bound on interest rates. Less known is that such taxes generated seigniorage in medieval Europe for around two centuries. When a Gesell tax was levied, current coins ceased to be legal and had to be exchanged into new coins for a fee. Using a cash‐in‐advance model, we analyze under what conditions agents exchange coins and the tax generates revenues. A low exchange fee, high punishments for using old coins, and a long time period between re‐mintings induce people to use new coins. This article is protected by copyright. All rights reserved
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Dieses Kapitel analysiert die Gründe für den in der Neuzeit beginnenden Edelmetallabfluss aus den europäischen Ländern, die trotz der Kontrollübernahme über bedeutende Edelmetallquellen erfolgte. Es wird auch von einer qualitativ neuen Entwicklung des Kreditwesens und des Geldumlaufs berichtet. Die Autorin untersucht die wachsenden Staatsschulden in Europa und die Rückzahlungsversuche, insbesondere durch eine neue Art von Banken, den Zentralbanken. Diese werden auch als ein notwendiger Baustein des zukünftig globalen Goldmonometallismus (dem Goldstandart) betrachtet. In diesem Zusammenhang wird den Ursachen, die Motivationen und die Folgen des Übergangs der Geldsysteme einzelner Länder zum Goldstandard nachgegangen. Dabei weist die Autorin auf Fehlfunktionen des globalen Goldstandards, die sich aus dem Unterschied zwischen seinen theoretischen Grundlagen und der Realität ergibt. Anschließend wird der Zusammenbruch des weltweiten Goldstandardsystems analysiert und seinen Folgen beschrieben. Außerdem werden Wege, die zu einer späteren Wiederaufnahme des Goldstandards führen könnten und über die Rolle einzelner Länder in diesem Prozess, besprochen.
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A government defines a dollar as a list of quantities of one or more precious metals. If issued in limited amounts, token money is a perfect substitute for precious metal money. Atemporal equilibrium conditions determine how quantities of precious metals and token monies affect an equilibrium price level. Within limits, a government can peg the relative price of two precious metals, confirming Fisher's (1911) response to a classic criticism of bimetallism. Monometallism dominates bimetallism according to a natural welfare criterion. This article is protected by copyright. All rights reserved.
Chapter
Full-text available
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Chapter
In December 2012, as a kick-off to the Federal Reserve System's centennial, the Federal Reserve Bank of Cleveland asked leading monetary historians and macroeconomic economists to address current and recurring economic concerns that confront central banks from a historical perspective. The resulting papers, published in this volume, cover a wide range of issues, including the meaning of central-bank independence, the role of communications and rules in fostering credibility, the evolution of the lender-of-last-resort function, the mechanism through which banks transmit economic shocks, and prospects for a European monetary union. A retrospective on the Federal Reserve, this book contains essays by some of the world's most prominent financial historians and provides a thorough overview of the evolution of the monetary standard over the past two centuries. Offering historical context as a complement to economic theory and empiricism, these papers investigate how financial infrastructure shapes economic outcomes through comparisons of Canada and the United States.
Chapter
Bimetallism vanished as a monetary framework in the late nineteenth century. By 1885 nearly all nations in the world had pegged their currency exclusively to either gold or silver, while a small minority operated a fiat money regime. This is surprising. From at least Roman times, many countries had sanctioned the unlimited monetary use of both silver and gold at a stable fixed exchange rate. This chapter investigates the strikingly rapid disappearance of bimetallism that began in the 1870s, and its relation to the international monetary system. In 1872 Germany de-monetized silver and adopted the gold standard. In 1873, France, the largest bimetallic country in the world, limited silver coinage in a bid to avoid the consequences of Gresham’s law (i.e., “swallowing” German silver and losing its entire gold circulation). This was a departure from strict adherence to bimetallism. And though from 1873 until 1876 French officials said that they were very likely to return to full-fledged bimetallism, that hope hinged on the possibility of reviving bimetallism in the face of the subsequent move to the gold standard by many other countries. But because of this international shift to the gold standard, a return to bimetallism would have exposed France to Gresham’s law. In this chapter I ask how long it would have taken for the French decision of 1873 to become irreversible from an economic standpoint. Essentially I investigate how widespread the adoption of the gold standard had to be to expose France to a complete drain on its gold circulation. The point of no return depended crucially on the size of the bimetallic bloc. The size of this bloc was directly related to the ability to use silver and gold reserves to cushion changing global precious metal demands at a fixed silver/gold mint ratio. For decades, France was the buyer and seller of last resort of both silver and gold, managing to peg the silver price of gold at 15.5 to 1.
Chapter
This article recounts the origin of Gresham’s Law, discusses its theoretical and empirical problems, and presents several refinements that have been proposed.
Chapter
A bimetallic monetary standard is a combination of two metallic standards, each of which could in principle stand alone. Bimetallism has advantages over monometallism; but can be an unstable system, with legal bimetallism becoming de facto monometallism. The Persian and Roman Empires practised bimetallism. England’s de facto bimetallism was short-lived, and US bimetallism difficult to maintain. French bimetallism in 1815–73 stabilized the gold–silver market price ratio and also exchange rates among gold, silver, and bimetallic countries. Bimetallism ended in the 1870s.
Chapter
Commodity money is a medium of exchange that may be transformed into a commodity, useful in production or consumption. Although commodity money is a thing of the past, it was the predominant medium of exchange for more than two millennia. Operating under a commodity money standard limits the scope for monetary policy, actions that alter the value of money. However, it does not eliminate monetary policy entirely. The value of money can be altered by changing the commodity content or legal tender quality of monetary objects, or by restricting the conversion of commodities into money or vice versa.
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The very use of the term ‘equality’ is often clouded by imprecise and inconsistent meanings. For example, ‘equality’ is used to mean equality before the law (equality of treatment by authorities), equality of opportunity (equality of chances in the economic system), and equality of result (equal distribution of goods), among other things. These different meanings often conflict, and are almost never wholly consistent. See Hayek (1960, p. 85; 1976, pp. 62–4) for a discussion of equality before the law and equality of result, and Rawls (1971) for a discussion of equality of opportunity within a theory of distributive justice. Elsewhere I have discussed the difference between equality of opportunity and equality of result in education (Coleman, 1975). See also Pole (1978) for a detailed examination of the changing conceptions of equality in American history.
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It is the duty of the United States to provide a means by which the periodic panics which shake the American Republic and do it enormous injury shall be stopped. - Robert L. Owen The founding of the Federal Reserve System in 1914 established the first official U.S. lender of last resort. Recurrent banking crises in the nineteenth and early twentieth centuries were widely viewed as evidence of defects in the U.S. banking system, including the absence of an official lender of last resort. Panics had been met by ad hoc actions by bankers (from Nicholas Biddle to J. P. Morgan), Secretaries of the Treasury (e.g., Leslie Shaw), and private clearinghouses, but these actions did not obviously reduce the frequency or severity of panics. The Fed’s founders sought to prevent panics from arising in the first place as well as provide a mechanism for limiting any crises that did occur. To achieve this objective, the Fed’s founders desired to (1) create an “asset-backed” currency whose supply was tied to the level of commercial activity rather than to the stock of government bonds held by banks and (2) establish reserve banks to hold the reserves of the banking system and to provide additional currency and reserves as needed by rediscounting commercial paper. The Fed’s founders expected that discount window lending would be the principal means by which the Federal Reserve would serve as lender of last resort to the banking system. However, the founders gave the Fed other tools as well, notably the ability to invest in government securities and banker’s acceptances, which subsequently were used to take lender of last resort actions as well as to implement monetary policy. This chapter reviews the Fed’s near-100 year history as lender of last resort. We do so with two objectives in mind. First, we document changes in the Fed’s behavior over time.
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Born in Brooklyn, New York, Abramovitz was educated at Harvard (AB, 1932) and Columbia (Ph.D., 1939). He held faculty appointments at Columbia (1940–2, 1946–8) and Stanford University (1948–77) and was a member of the research staff of the National Bureau of Economic Research from 1938 to 1969. From 1942 to 1946 he worked as an economist for several organizations within the United States government. He was elected president of the American Economic Association in 1979–80.
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In this paper we provide a quantitative evaluation of foreign financial advising, taking China’s currency reform proposals as an example. Between 1903 and 1929, three Western financial experts proposed a gold (‐exchange) standard to China, which at that time was on a silver standard. Using counterfactual simulation, we find that: (1) a gold (‐exchange) standard would not have brought price stability to China; (2) and it could have even worsened global deflation during the beginning years of the Great Depression.
Chapter
A commodity is an object that is intrinsically useful as an input to production or consumption. A medium of exchange is an object that is generally accepted as final payment during or after an exchange transaction, even though the agent accepting it (the seller) does not necessarily consume the object or any service flow from it. Money is the collection of objects that are used as media of exchange. Commodity money is a medium of exchange that may become (or be transformed into) a commodity, useful in production or consumption. This is in contrast to fiat money, which is intrinsically useless.
Chapter
In December 2012, as a kick-off to the Federal Reserve System's centennial, the Federal Reserve Bank of Cleveland asked leading monetary historians and macroeconomic economists to address current and recurring economic concerns that confront central banks from a historical perspective. The resulting papers, published in this volume, cover a wide range of issues, including the meaning of central-bank independence, the role of communications and rules in fostering credibility, the evolution of the lender-of-last-resort function, the mechanism through which banks transmit economic shocks, and prospects for a European monetary union. A retrospective on the Federal Reserve, this book contains essays by some of the world's most prominent financial historians and provides a thorough overview of the evolution of the monetary standard over the past two centuries. Offering historical context as a complement to economic theory and empiricism, these papers investigate how financial infrastructure shapes economic outcomes through comparisons of Canada and the United States.
Chapter
In December 2012, as a kick-off to the Federal Reserve System's centennial, the Federal Reserve Bank of Cleveland asked leading monetary historians and macroeconomic economists to address current and recurring economic concerns that confront central banks from a historical perspective. The resulting papers, published in this volume, cover a wide range of issues, including the meaning of central-bank independence, the role of communications and rules in fostering credibility, the evolution of the lender-of-last-resort function, the mechanism through which banks transmit economic shocks, and prospects for a European monetary union. A retrospective on the Federal Reserve, this book contains essays by some of the world's most prominent financial historians and provides a thorough overview of the evolution of the monetary standard over the past two centuries. Offering historical context as a complement to economic theory and empiricism, these papers investigate how financial infrastructure shapes economic outcomes through comparisons of Canada and the United States.
Chapter
The chapter focuses on what is traditionally called the “functions of money.” The author use the term “services” rather than “functions” to emphasize that money actually produces something that is valued, several things, in fact. These three services are serving as a medium of exchange, as a store of value, and as a unit of account. Money can be classified into two major types, commodity moneys and credit, or fiduciary, moneys. Monetary theory is composed of theories of the demand for money and the supply of money. Demand and supply are the backbone of economic theory, but little theoretical attention is given to the demand for and supply of specific goods other than money. Two industries in particular are involved in the supply of money - the mining industry and the banking industry. Some writers have been for monetary policy in the economies of the ancient Mediterranean region.
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This paper provides a theoretical account for the fundamental defects of commodity money as an imperfectlyrecognizable medium of exchange. We incorporate the recognizability of silver as a medium of exchange explicitly into the search-based model where silver can be either used as a medium of exchange or invested in the world market for a given rate of return. When the recognizability of silver becomes severe, both the real balance of silver as a medium of exchange and the quantity traded decrease substantially. The declining real balance of silver is due to either a decrease in the nominal balance of silver when silver is abundant or a decrease in the price of silver when silver is scarce. The variability of silver demand and price also affects relative prices as long as silver coin is used as an imperfectly-recognizable medium of exchange. An increase in the recognizability of silver improves welfare through its effects on extensive and intensive margins, net of opportunity cost of holding nominal balance of silver for a trade. This implies the superiority of fiat money which is almost perfectly recognizable.
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The study of financial markets is a growing part of cliometrics for at least three reasons. First, appreciation of the role financial markets played in the rise and spread of capitalism has grown, along with concerns about financial crises. Second, accessibility to the immense amount of data generated by financial markets keeps improving thanks to continued advances in digital communications technology. Third, analytical techniques for determining the behavioral patterns of time series have advanced. While typically only price data for financial assets are available without the corresponding volume of the assets being traded, the consequences of sharp, or sustained, changes in the price of financial assets can be detected in other economic data. Interesting insights on fundamental historical issues are also possible by applying economic and political theory to cliometric studies of financial markets.
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The payments system is the complex of financial instruments and relationships that transfer value between buyers and sellers to complete their transactions. The character and reliability of the payments system, the rules, practices, and institutions by and through which value is transferred from payors to payees, is obviously a crucial underpinning to a market economy. Cash is the simplest means of payment. However, the vast majority of transactions, especially in developed economies, involve non-cash payments instruments. The use of non-cash instruments in the payments process can take time and involve some risk since they are promises to make future payments. Payments system improvements that reduce costs and/or risks should have a salutary effect on the operations of a market economy.
Research
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The purpose of this research is to investigate the change of reserve currency in Iran during the period 2002-2007. To do so, the annual data in Iranian economy and other countries, for example European Union and USA have been used. The results indicate the US-Dollar’s dominant role in the word economy.
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United States then, Europe now Under the Articles of the Confederation, the central government of the United States had limited power to tax. Therefore, large debts accumulated during the US War for Independence traded at deep discounts. That situation framed a US fiscal crisis in the 1780s. A political revolution –for that was what scuttling the Articles of Confederation in favor of the Constitution of the United States of America was—solved the fiscal crisis by transferring authority to levy tariffs from the states to the federal government. The Constitution and acts of the First Congress of the United States in August 1790 gave Congress authority to raise enough revenue to service a big government debt. In 1790, the Congress carried out a comprehensive bailout of state governments’ debts, part of a grand bargain that made creditors of the states become advocates of ample federal taxes. That bailout created expectations about future federal bailouts that a costly episode in the early 1840s proved to be unwarranted. JEL codes: N21, N41
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Using a database of 100,000 quotations, this paper studies how exchange rates between the British pound sterling, the French franc and the Hamburg mark banco were constrained from 1821 to 1873 by “bimetallic snakes” made up of gold and silver points. It differs from previous studies in that it adds Hamburg to the financial centres of London and Paris, and highlights the range of precious metals arbitrage. It shows a permanent distribution of roles: Hamburg absorbed bullion from Paris, with London acting as intermediary. This suggests the existence of a European bimetallic system linking three zones, one zone being silver standard, one double standard, and one gold standard.
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In 1624–1776, Sweden implemented a complicated trimetallic monetary system. Five different copper, silver, and gold currencies circulated. The heaviest copper coins weighed 20 kg. Gresham's law worked differently for various coins. Swedish trimetallism was asymmetric. Copper money could not replace silver and gold coins. When the latter became undervalued they circulated at a premium. Due to high transaction costs in using copper coins at a premium, they were sometimes driven out when becoming dear money. However, complaints about money shortage and Sweden's monopoly position at the European copper markets implied that the copper standard was not abandoned until 1777.
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This article analyses the stability of bimetallism in the mid-18th century for the case of two large centres that had different legal ratios and only one international market ratio. A new theoretical framework is articulated for the situation of international independence to set legal bimetallic ratios by monetary authorities in different countries. Then, using new data handcollected from archival sources and relevant to the two main bullion markets in the 18th century, Amsterdam and London, this theoretical framework is utilised to identify the regimes that actually prevailed during that period, in which Amsterdam was effectively on the bimetallic standard while London was on the gold standard de facto.
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This paper analyzes the integration of the foreign exchange market for the Basle Pound and the Rhinegulden and the market for gold and silver bullion for the period 1365–1429. The application of a threshold error correction model indicates that transaction costs prevent arbitrage when the difference between the gold-silver ratio and the exchange rate is within a 7.4% band, whereas larger deviation exchange rate movements close this gap within one year.
Book
How did today’s rich states first establish modern fiscal systems? To answer this question, Political Transformations and Public Finances by Mark Dincecco examines the evolution of political regimes and public finances in Europe over the long term. The book argues that the emergence of efficient fiscal institutions was the result of two fundamental political transformations that resolved long-standing problems of fiscal fragmentation and absolutism. States gained tax force through fiscal centralization and restricted ruler power through parliamentary limits, which enabled them to gather large tax revenues and channel funds toward public services with positive economic benefits. Using a novel combination of descriptive, case study and statistical methods, the book pursues this argument through a systematic investigation of a new panel database that spans eleven countries and four centuries. The book’s findings are significant for our understanding of economic history and have important consequences for current policy debates.
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Old Regime polities typically suffered from fiscal fragmentation and absolutist rule. By the start of World War I, however, many such countries had centralized institutions and limited government. This paper uses a new panel or time-series cross-section (TSCS) data set to perform a two-part statistical analysis of political regimes and public revenues in Europe from 1650 to 1913. Panel regressions indicate that centralized and/or limited regimes were associated with significantly higher revenues than fragmented and absolutist ones. Structural break tests also suggest close relationships between major turning points in revenue series and political transformations.
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This paper surveys the growing literature on payments. We begin by presenting a simple model that illustrates the essential function of payments and how this may be implemented through various arrangements. We show how the basic models of payments have been used to address a variety of microeconomic and macroeconomic policy issues. We then discuss the links between payments economics and other fields, including monetary theory, corporate finance, and industrial organization. We conclude with an overview of the empirical literature and directions for future research.
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This paper models the gold standard as a state contingent commitment technology that is only feasible during peace. Monetary policy during war, when the gold convertibility rule suspended, can still be credible, if the policy maker’s plan is to resume the gold standard in the future. The DGE model developed in this paper suggests that the resumption of the gold standard was a sustainable plan, which replaced the gold standard as a commitment technology and made monetary policy time consistent. Trigger strategies support the equilibrium: private agents retaliate if a policy maker defaults its plan to resume the gold standard.
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The quantity theory of money was associated with the politics of the right in the '70s and '80s, but a century earlier, particularly in America, it had played an important part in the proposals of the Progressive left. These political associations are examined, and it is argued that a crucial factor in the quantity theory's apparent migration from left to right was its newly-forged links to the case for monetary policy rules in the interwar years. It was also in the 1930s that the endogenous-money Banking School doctrines deployed by anti-quantity theorists during the monetarist controversy first became mainly associated with the case for discretionary policy, rather than with support for the gold-standard rule, as they had been in earlier times. More generally, shifting scientific opinion about the causes of the Great Depression moved the political centre of gravity of monetary economics to the left from the 1930s onwards, and then back towards the right beginning in the '60s, creating an illusion of movement on the quantity theory's part.
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This article attempts to provide a new view of how the bimetallic standard was maintained before 1873 and how it came to change into a monometallic gold standard between 1870 and 1880. The conventional view that the gold standard emerged out of the contradictions of bimetallism is not persuasive. Instead, this article claims that bimetallism might have survived and provides an alternative explanation of the emergence of the gold standard. Political and historical factors proved essential in precipitating the uncoordinated emergence of the international gold standard.
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In 1816 England officially abandoned bimetallism and made silver coins into tokens that were only limited legal tender. Earlier monetary authorities had lacked the ability to manage a subsidiary coinage, a necessary complement to the monometallic gold standard. A successful token coinage must be both costly to counterfeit and credibly backed to ensure that the tokens do not depreciate to their intrinsic value. These problems were solved in the nineteenth century through the introduction of steam-driven stamping presses and with the assistance of the Bank of England.
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I examine the title question in a competitive framework where the transaction demand for money is modeled using a cash-in-advance constraint and only distortionary taxes are possible. Empirical evidence and simulations are used to document the plausibility of the assumptions which produce the Friedman rule; these findings suggest that it is not a good benchmark. My results suggest that an optimal monetary policy calls for nominal interest rates that can exceed 6% per year.
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Commodity money is modeled as one or two of the capital goods in a one-consumption good and one or two capital-good, overlapping generations model. Among the topics addressed using versions of the model are (i) the nature of the inefficiency of commodity money, (ii) the validity of quantity-theory predictions for commodity money systems, (iii) the circumstances under which one commodity emerges naturally as the commodity money, (iv) the role of inside money (money backed by private debt) in commodity money systems and (v) the circumstances under which a government can choose the commodity to serve as the commodity money.
Article
The U.S. Coinage Act of 1873 eliminated provision for the free coinage of silver. That act cast the die for a gold standard. The conventional view is that "the act of 1873 was a piece of good fortune." This paper indicates that it was the opposite--a mistake that had highly adverse consequences. This is a judgment about 1873, not 1896. By 1896, when William Jennings Bryan ran for president on a "free-silver ticket," it was too late to undo the damage. Bryan was trying to close the barn door after the horse had been stolen. Copyright 1990 by University of Chicago Press.
Article
In this paper we consider a particular international economic policy regime: the laissez-faire regime, the distinguishing features of which are unrestricted portfolio choice and floating exchange rates. And as we show, this regime, although favored by many economists, is not economically feasible. It does not have a determinate equilibrium. That is an implication of an overlapping-generations model. More basically, it is an implication of the notion that money is wanted only in order to accomplish trades.
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This paper formulates a model of commodity money that circulates by tale, and applies it to a variety of situations, some of which seem to confirm, and others to contradict, `Gresham's Law'. We analyze how debasements could prompt decisions of citizens voluntarily to participate in recoinages that subjected them to seigniorage taxes.
Article
This paper presents a simple model showing how the price level is determined under bimetallism and responds under it to changes in various exogenous variables. It also assesses the stability of the price level under bimetallism and compares the stability of the bimetallic price level with the stability of the price level under a gold standard. The model provides a number of new theoretical results about bimetallism. It also bears out the bimetallist claim that the bimetallic price level should be more stable than the price level under a monometallism provided other things are reasonably equal and both precious metals are used for monetary purposes. Copyright 1996 by Blackwell Publishers Ltd and The Victoria University of Manchester
Article
L'int�r�t de l'approche par les jeux globaux ("global games'') est pr�cis�ment d'ancrer les anticipations sur des variables exog�nes r�elles. On peut ainsi garder l'aspect auto-r�alisateur des anticipations mais en restaurant l'unicit� de l'�quilibre et donc un meilleur pouvoir pr�dictif du mod�le. Nous illustrons ces m�canismes sur deux exemples. Le premier a trait au choix r�sidentiel d'agents qui ont une pr�f�rence "identitaire''. Le second a trait � la contagion de paniques bancaires d'un pays � un autre. De mani�re plus g�n�rale, tous les jeux qui pr�sentent des compl�mentarit�s strat�giques sont susceptibles d'�tre analys�s au moyen des techniques des "global games''. Il convient toutefois de rappeler que les techniques utilis�es demeurent assez sp�cifiques: l'incertitude strat�gique porte essentiellement sur les croyances de premier degr� des autres acteurs. Or, si de mani�re plus g�n�rale on suppose que cette incertitude peut porter sur des ordres plus �lev�s, les conclusions des mod�les peuvent changer. Ainsi, Weinstein et Yildiz (2004) montrent que dans un oligopole de Cournot, il y a une tr�s grande multiplicit� d'�quilibres si on suppose que l'incertitude porte sur les croyances de niveaux suffisamment �lev�s.
Article
As its central feature, a bimetallic standard grants nominal debtors an option to deliver either of two metals. With results from the option pricing literature,construction of a formula to evaluate the bimetallic option in debt instruments is straightforward. With this formula, one can compute the option value in a wide range of nineteenth-century U.S. Treasury securities. Posession of the option values permits an adjustment of the yields on U.S. securities to make them comparable to yields on nonmetallic European securities. Evaluating the option allows the estimation of transfers from debtors to creditors. Copyright 1986 by American Economic Association.
Article
L'int�r�t de l'approche par les jeux globaux ("global games'') est pr�cis�ment d'ancrer les anticipations sur des variables exog�nes r�elles. On peut ainsi garder l'aspect auto-r�alisateur des anticipations mais en restaurant l'unicit� de l'�quilibre et donc un meilleur pouvoir pr�dictif du mod�le. Nous illustrons ces m�canismes sur deux exemples. Le premier a trait au choix r�sidentiel d'agents qui ont une pr�f�rence "identitaire''. Le second a trait � la contagion de paniques bancaires d'un pays � un autre. De mani�re plus g�n�rale, tous les jeux qui pr�sentent des compl�mentarit�s strat�giques sont susceptibles d'�tre analys�s au moyen des techniques des "global games''. Il convient toutefois de rappeler que les techniques utilis�es demeurent assez sp�cifiques: l'incertitude strat�gique porte essentiellement sur les croyances de premier degr� des autres acteurs. Or, si de mani�re plus g�n�rale on suppose que cette incertitude peut porter sur des ordres plus �lev�s, les conclusions des mod�les peuvent changer. Ainsi, Weinstein et Yildiz (2004) montrent que dans un oligopole de Cournot, il y a une tr�s grande multiplicit� d'�quilibres si on suppose que l'incertitude porte sur les croyances de niveaux suffisamment �lev�s.
Bimetallism: A Summary and Examination of the Arguments for and against a Bimetallic System of Currency 41 rDrake, Louis S. “Reconstruction of a Bimetallic Price Level
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London and New York: RoutledgeAs Good as Gold? Bimetallism in EquilibriumThe French Crime of 1873: An Essay on the Emergence of the Inter-national Gold Standard
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Flandreau, Marc. Monetary Standards and Exchange Rates, edited by Maria Cristina Marcuzzo, Lawrence H. Officer and Annalisa Rosselli. London and New York: Routledge, 1997. “As Good as Gold? Bimetallism in Equilibrium, 1850–70.” In Flandreau, Marc. “The French Crime of 1873: An Essay on the Emergence of the Inter-national Gold Standard, 1870–80.” Journal of Economic History 56 (December 1996): 862–97
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Patterson, C. C. " Silver Stocks and Losses in Ancient and Medieval Times. " Economic History Review 2d ser., 25 (May 1972): 205–35.
Geschichte des Goldes: die Goldenen Zeitalter in ihrer kulturellen und wirtschaftlichen Bedeutung
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Quiring, Heinrich. Geschichte des Goldes: die Goldenen Zeitalter in ihrer kulturellen und wirtschaftlichen Bedeutung. Stuttgart: Ferdinand Enke Verlag, 1948.
Some Evidence on the Real Price of Gold, Its Cost of Production, and Commodity Prices
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Rockoff, Hugh. " Some Evidence on the Real Price of Gold, Its Cost of Production, and Commodity Prices. " In A Retrospective on the Classical Gold Standard, 1821– 1931, edited by Michael D. Bordo and Anna J. Schwarz. Chicago: University of Chicago Press, 1984.
Final Remarks: Production and Trade of Gold, Silver, Copper and Lead from 1450 to 1750
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Kellenbenz, Hermann. " Final Remarks: Production and Trade of Gold, Silver, Copper and Lead from 1450 to 1750. " In Precious Metals in the Age of Expansion: papers of the XIVth International Congress of the Historical Sciences, edited by Hermann Kellenbenz. Stuttgart: Klett-Cotta, 1981.
The Case against Bimetallism
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Giffen, Robert. The Case against Bimetallism. London: George Bell & Sons, 1892.
Report Made by Edward Atkinson, of Boston, Mass., to the President of the United States upon the Present Status of Bimetallism in Europe
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U.S. Senate. Report Made by Edward Atkinson, of Boston, Mass., to the President of the United States upon the Present Status of Bimetallism in Europe. 50th Cong., 1st sess., 1887. Ex. Doc. 34
Elements of Pure Economics. Translated by William Jaffé
  • Léon Walras
Walras, Léon. Elements of Pure Economics. Translated by William Jaffé. Fairfield, NJ: Augustus M. Kelley, 1977.
The History of Currency, 1252 to 1894
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Shaw, William Arthur. The History of Currency, 1252 to 1894. London: Wilsons & Milne, 1896.
The History of Bimetallism in the U.S
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Laughlin, James Laurence. The History of Bimetallism in the U.S.. New York: D. Appleton and Company, 1896.
The Big Problem of Small Change Federal Reserve Bank of Chicago: Working Paper
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Sargent, Thomas J. and François R. Velde. " The Big Problem of Small Change. " Federal Reserve Bank of Chicago: Working Paper 97-8, 1997.
Bimetallism: A Summary and Examination of the Arguments for and against a Bimetallic System of Currency
  • Leonard Darwin
Darwin, Leonard. Bimetallism: A Summary and Examination of the Arguments for and against a Bimetallic System of Currency. New York: D. Appleton & Company, 1898.
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Oppers, Stefan E. " A Model of the Bimetallic System. " International Monetary Fund: Working Paper 95/144, 1995.