transactions. Metals were an obvious choice, given their innate value as a useful material for making goods, combined with their durability over time. Plus, they could be fashioned into relatively light and portable coins—at least relative to barter exchange in bulky goods. Archaeologists have documented the wide use of metal coins around the world—with bronze coins predominating from Asia to Europe during the centuries before the birth of Christ, and silver and gold coins gaining greater circulation in later centuries.<sup>7</sup> Eventually, silver and gold became the bimetallic choice.

Bimetallism of various forms prevailed during the onset of the Industrial Revolution and subsequent decades.8 There has been much scholarly discussion on the stability of the bimetallic system.9 In general, the system was relatively stable over the 1850 to 1873 period – despite a huge increase in the supply of gold following the famous California Gold Rush. Flandreau (2004) cites the influence of this expansion of supply, but he concludes that a combination of political and economic factors following the end of the Franco-Prussian war led to the demise of bimetallism in continental Europe. Decades before, Britain had moved to the gold standard, discussed in more detail below.

In the United States, there was no formal central bank during the bimetallic period. States allowed banks to issue notes backed by state bonds during the so-called “Free Banking” period. During the civil war, the inconvertible “greenback” was created. In the “crime of 1873,” 10 the United States government returned to minting specie and decided not to produce the silver dollar, focusing purely on gold. Immediately after the US switched to a gold standard regime, the market price of gold rose sharply (including in terms of silver), which led to a strong deflationary trend in the ensuing two decades.

**Gold Standard (1819-1914).** The gold standard was established in 1819 by Britain.  Other countries in the continental Europe, as well as Japan and the US, adopted the gold standard as the basis for their currency in the following decades.  By 1880, most countries were on some form of the gold standard.  China and India were important exceptions, since they maintained a silver standard.11  Under the gold standard, the primary responsibility of a central bank was to preserve the official parity between its currency and gold.  In order to maintain this price, the central bank needed to own an adequate stock of gold.  During this period, the surplus or deficit in the balance of payments had to be financed through shipments of gold between central banks – from deficit countries to surplus countries.

7 Williams (1997) provides a graphic history complete with photos from the collection of the British Museum. 8 There were, however, early experiments with paper fiat money. For example, see Goldberg (2009) for a description of fiat money use in colonial Massachusetts in the late 17<sup>th</sup> century. There were also “bills of exchange” issued by banks in Europe during the 18<sup>th</sup> century that gained greater or lesser degrees of acceptance depending upon the degree of trade and financial linkages across cities (Flandreau et al, 2009).

9 Such notable figures in economics as Irving Fisher (1894) and Milton Friedman (1990) have offered analysis of the stability properties of bimetallism. Both argue that there is no inherent superiority of a single specie system over a bimetallic system. Flandreau (2002) later developed a model to support this view and explain the historical experience. These analyses focus on self-correcting mechanisms in the system. Diebolt and Parent (2008) provide evidence that policy coordination between French and British central banks also may have played a crucial role in stabilizing bimetallism for decades prior to its eventual collapse.

10 Refers to the US Coinage Act of 1873 which eliminated provision for free coinage of silver and cast the die for the gold standard. See Friedman (1990). Also see Velde (2002) for the rather tumultuous political and economic history of the move towards the gold standard. Silver producers lobbied against the end of bimetallism. See Rolnick and Weber (1983 and 1988) for a discussion of the Free Banking Era.

11 A silver standard operates on the same principle as gold, as described in this section. In general, Asian countries switched to a gold standard later. Japan did so only in 1897. The Philippines moved to a gold standard around 1909. See Kemmerer (1912) for a discussion of the silver price spike of the early 20<sup>th</sup> century as the context for currency reform in a number of countries. The impact of the changing relative price between gold and silver was particularly strong on silver-based economies. One particularly interesting episode is the Chinese experience during the Interwar Period, when China abandoned the silver standard in 1935. See Kreps (1934) and Leavens (1936).

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