The beginning of United States Bimetallism and the ratio change in 1834
It is also notable that before the great discoveries of gold (CA, 1848) and silver (Nevada, 1858), the US suffered from an ongoing shortage of supply of native species. Therefore, the supply shock under the condition of money market approval is extremely important for the money market.
Reasons for the Ratio Change in 1834
White, the chairman of the committee, who favored the single gold standard, moved to amend by making the ratio sixteen to one, and his amendment was carried without a division. There were a number of different motives that led to the adoption of the gold note, but among these the desire to obtain gold instead of silver was the most influential.
The “Crime of 1873” and Its International Background
The “Crime of 1873”
This was at the height of the famous "Bank War" between President Andrew Jackson and Biddle, which ultimately resulted in the bank's failure to obtain a new charter when its original federal charter expired in 1836. Although French officials claimed from 1873 to 1876 that it is very likely that they will return to full bimetallism, that hope rests on the possibility of a revival of bimetallism upon the later transition to the gold standard of many other countries.
Reasons of Preference for Gold standard
The enormous growth in trade in the middle decades of the 1800s naturally also contributed to a greater attraction to the superior trade clearing metal. A rising urban capitalist class (professionals, business, banks) displaced an agricultural class (farmers and landowners) in the political hierarchy, and the monetary victory of gold over silver and bimetallism coincided in many ways with the political victory of the bourgeoisie.
The hope of resurrection of Bimetallism in 1880’s and 1890’s
One can only speculate about the possible effect of the continued free silver in the Latin Union after 1873 on the monetary policies of the other major financial powers. The difference between the expenditure and the value of the coins represents the seigniorage received by the Treasury.
Baseline Model
BGG Model
Data
The E ff ect of Ratio Change in 1834
Table 4 shows the full Bayesian estimation results for the auxiliary model. As shown in Figure 15, the aid model predicts that one standard deviation (10.48%) of an exogenous monetary shock would boost GDP growth by 3%, and investment by about 6%. %, and inflation of about 5.3% in the short term. Therefore, to estimate how the legal ratio changing from 15:1 to 16:1 affected the economy, we simply need to estimate this policy equivalent change in the money supply in 1834.
Counterfactual Analysis for the demonetization of silver in 1873
Because the simulated output (inflation) variance from the auxiliary model is almost 2 (3) times of the actual one. Furthermore, proponents of bimetallism claim that bimetallism reduces fluctuations in the price level due to shocks in metal supplies compared to monometallic standards.
International Bimetallism
The Existence of Bimetallism
The resulting reduction in the supply of gold in commodity markets has typically raised the relative price of gold there, pushing it back toward the mint ratio. The three containers represent the nominal demand for money in three areas: the gold standard area with mostly gold coins in the money supply, the silver standard area with mostly silver coins in the money supply, and the bimetallic area with both gold and silver coins in the money supply. an offer of money. Friedman (1990) found that between 1823 and 1873 the market ratio remained in a 6% band around the French mint ratio (see Figure 1). stocks of gold and silver.
Therefore, the constant relative regulatory circulation of gold and silver coins in France acted as a balancing mechanism. Flandreau (1995) examined a survey of coins in the 1870s which showed gold and silver coins with mint dates covering the full periods since 1820 surviving in the money supply at that time.
Counterfactual Analysis for the Viability of Bimetallism
Model
Furthermore, as a simplified version of Flandreau (1996a), I consider only the monetary use of gold and silver. G=MGg+MGb and S = MSs +MSb (III.5) Where G and S are the total global reserves of gold and silver, respectively. I further define G as the share of gold block money demand in world money demand and mS as the share of silver block money demand in world money demand as expressed as follows.
With restricted regression, mGandmS can be estimated given the world's monetary gold (G) and silver supply (S) and France's monetary gold (MGb) and silver supply (MSb). A proper bimetallic equilibrium requires that both metals circulate in the bimetallic block or pGMGb >0, and MbS >0, therefore we can derive the upper and lower bounds for the relative gold price in silver pGSG as expressed in the following inequalities:.
Comparative Statics for Germany’s switching from Silver to Gold Standard
The second and more detailed one was adopted in 1873, when Germany began selling silver on the international bullion market. When Germany started selling silver and buying gold in the international bullion market, it increased the demand for gold in the gold bullion and decreased the demand for silver in the silver bullion. If the US had not stopped specie payment in 1873, it would still be on de facto gold, then the change in the price level when Germany started selling silver in 1873 can be calculated using equation (45).
The average nominal wage of labor rose about 25% from 1871 to 1873 as the typical gold standard country had since 1798. And if the United States had not suspended specie pay that same year, it would likely have experienced inflation as well. rather than actual deflation.
Counterfactual Analysis of the hypothetical coalition between US and France
Which makes one wonder if this coalition ever happens, the fate of bimetallism will be rewritten. To figure this out, one only needs to imagine that the bimetallic block now had two members: France and the United States with their own legal relationship unchanged. Therefore, all counterfactual G∗ m∗S mm∗G ·pg∗andmm∗S ·ps∗ can be estimated using the total money supply in the United States and France from the years 1949 to 1871.
In the event of an international flight from the silver to the gold standard in the Nordic countries, the demand for monetary silver from the silver block will decrease, which should equal the increased demand for gold from the gold block. The demise of bimetallism (i.e. the gold of both France and the US is depleted) would be inevitable if β is large enough for pGSG to fall below the new lower bound m.
Conclusion
Therefore, other than the switch of the US money standard from de facto silver to de facto gold, the effect of the Coinage Act of 1834 on the activity of the real economy is relatively small. The counterfactual using the baseline model predicts output and inflation variances would be 5.97% and 6.57%, respectively. I modify Flandreau's (1996a) model; Meissner (2015) and found that if the United States did not pass the "Currency Act of 1873", its price level could have a sharp increase of up to 40%.
If the United States and France had cooperated to adopt bimetallism, to make bimetallism obsolete, we would need a group of countries diverted from the silver block to gold whose total money demands are up to 71.23 %. In other words, the Coinage Act of 1873 is definitely not a crime in the economic sense.
Introduction
Historical Background for Classical Gold Standard Era
Furthermore, Bordo et al. (2004) believe that the "V-shaped" price level series over the entire classical gold standard period can be partially explained by the fluctuations in gold production and discoveries. The increases in money supply as a result of the silver purchases did not directly affect the domestic price level to the best of my knowledge there has not been a dynamic stochastic general equilibrium model that includes gold production and gold discoveries as monetary shocks for the classical gold standard periods.
I built a small-scale DSGE model with a gold production sector in addition to the conventional final goods production sector. Furthermore, because gold production is only calibrated to account for 1% of aggregate production, the discovery of gold does not greatly affect the production level (0.04%).
Model
Gold
Consumption
Money
Exogenous Shocks
Household Utility Maximization Problem
Data
- Other Sources of Data
- Calibration and Steady-state Values
- Lag Selection
- Bayesian Estimation Result
As discussed earlier, the new shocks that occurred earlier with the discovery of gold will only affect gold production after six years. By adding each year's remaining resources for all previously discovered and producing deposits, we got the annual series of gold discoveries. Therefore, in the quarterly model I created, I also constructed an annual gold discovery aggregate, which can be observed every four quarters.
Figures 8,9,10 are the Bayesian impulse response for one standard deviation of the gold discovery shock with a six-year lag. When a standard deviation of the gold discovery shock hits the economy, agents form an expectation that the relative gold price (pg) will decline in six years.
Adaptive Learning
- Introduction
- Kalman Filter learning
- Constant Gain Learning
- Learning Result
It assumes that the agents predict the values of the forward variables as a reduced form linear function of the state variables. After agents update their beliefs about β in each period, they substitute βt into equation (IV.18) and obtain their expectations for all forward-looking variables, Etyt+1f. Comparing the Kaman filter learning solution (IV.21) with the rational expectation solution (IV.15), we notice that the parameters in (IV.21) are updated every period.
To illustrate how the CG works, we start again with the DSGE representation following Evans & Honkapohja(2012) as in equation (IV.15). The PLM has the same structural form of the rational expectations solution of the system, that is, it includes the same regressors that appear in the minimum state variable (MSV) solution under rational expectations (IV.15).
Conclusion
These two differences together show that agents pay more attention to the impact of the gold discovery on direct consumption, and less to its impact on the money supply transmission mechanism. Constrained by the condition that the gold market frees up, the decline in the real balance overcomes the increase in gold consumption, causing gold production (y2) to initially fall slightly. N1andy1 increases significantly because the gold production sector is calibrated at 1% of total GDP, so overall composite consumption (H) increases and the shadow price of consumption (λ) decreases.
There is also a lot of anecdotal evidence that it takes time for word to spread. The data favor a story under the KFL assumption that agents notice more the impact of the gold discovery on direct consumption, less its impact on the money supply transmission mechanism.
FOCs
Equilibrium
Steady State
Other Data Sources
