Discussion Paper Details

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Title: Pulling up the Tarnished Anchor: The End of Silver as a Global Unit of Account

Author(s): Ricardo Fernholz, Kris James Mitchener and Marc Weidenmier

Publication Date: April 2017

Keyword(s): bimetallism, classical gold standard, fixed exchange rates, silver and unit of account

Programme Area(s): Economic History and International Macroeconomics and Finance

Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s - the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system in which the gold price of silver fluctuates has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.

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Bibliographic Reference

Fernholz, R, Mitchener, K and Weidenmier, M. 2017. 'Pulling up the Tarnished Anchor: The End of Silver as a Global Unit of Account'. London, Centre for Economic Policy Research.