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Stabilizing Arbitrage

Gresham's Law

Gold Standard Wins



FX Micheloud (click left)   or   Monetary History (click right)

The market for gold

Besides their uses as money, gold and silver could also serve as jewels, teeth, plates, etc... In the 19th century like today, both metals were actively traded on the so-called bullion markets, where their price changed every day. With the dollar defined in terms of gold or silver, it doesn't make sense to talk of a dollar price of gold, because this price is legally fixed. But you can consider the ratio of the price of silver to that of gold, or put differently, how many pounds of silver do you need to get one of gold. This ratio has been very stable for the greater part of the 19th century (see SLIDE BELOW), moving in a narrow band around the legal ratio in France of 15.5 pound of silver for one of gold. Then, suddenly, in the 1870's that ratio goes up and up until it reaches 40 thirty years later.

What happened ?


A graph showing the evolution of the ratio of the price of silver to the price of gold

How many pounds of silver for one pound of gold ?
Source for this slide is an article by Milton Friedman (for full reference, click here)

The market ratio had been very stable until 1871. The reason is, the bimetallic franc Germinal and all the European currencies that revolved around it did stabilize the market ratio around the legal ratio fixed at 15 for 1. With one country after the other leaving silver for a full gold standard between 1871 and 1900, the demand for gold increased strongly, while tons of silver were freed. Go to the next slide to learn more about the development of the gold standard.

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