224 Hegemonic Stability Theories of the International Monetary System
Hence the plausible explanation for the contrast between the 1870s and earlier
years is the danger of exceptionally rapid inflation due to the magnitude of
post-1870 silver discoveries. Between 1814 and 1870, the sterling price of
silver, of which so much was written, remained within 2 percentage points of
its 1814 value, alternatively driving gold or silver from circulation in bimetallic
countries but fluctuating insufficiently to raise the specter of significant price
level changes. Then between 1871 and 1881 the London price of silver fell by
15 percent, and by 1891 the cumulative fall had reached 25 percent. Gold
convertibility was the only alternative to continued silver coinage that was
judged both respectable and viable. The only significant resistance to the
adoption of gold convertibility emanated from silver-mining regions and from
agricultural areas like the American West, populated by proprietors of
encumbered land who might benefit from inflation.
Seen from this perspective, the impetus for adopting the gold standard existed
independently of Britain’s rapid industrialization, dominance of international finance,
and preeminence in trade. Still, the British example surely provided encouragement
to follow the path ultimately chosen. The experience of the Latin Monetary Union
impressed upon contemporaries the advantages of a common monetary standard
in minimizing transactions costs. The scope of that common standard would be
greatest for countries that linked their currencies to sterling. The gold standard
was also attractive to domestic interests concerned with promoting economic growth.
Industrialization required foreign capital, and attracting foreign capital required
monetary stability. For Britain, the principal source of foreign capital, monetary
stability was measured in terms of sterling and best ensured by joining Britain on
gold. Moreover, London’s near monopoly of trade credit was of concern to other
governments, which hoped that they might reduce their dependence on the London
discount market by establishing gold parities and central banks. Aware that Britain
monopolized trade in newly mined gold and was the home of the world’s largest
organized commodity markets, other governments hoped that by emulating Britain’s
gold standard and financial system they might secure a share of this business.
Britain’s prominence in foreign commerce, overseas investment, and trade credit
forcefully conditioned the evolution of the gold standard system mainly through
central banks’ practice of holding key currency balances abroad, especially in
London. This practice probably would not have developed so quickly if foreign
countries had not grown accustomed to transacting in the London market. It would
probably not have become so widespread if there had not been such strong
confidence in the stability and liquidity of sterling deposits. And such a large
share of foreign deposits would not have gravitated to a single center if Britain
had not possessed such a highly articulated set of financial markets.
But neither Britain’s dominance of international transactions nor the desire
to emulate Bank of England practice prevented countries from tailoring the gold
standard to their own needs. Germany and France continued to allow large internal
gold circulation, while other nations limited gold coin circulation to low levels.
The central banks of France, Belgium, and Switzerland retained the right to
redeem their notes in silver, and the French did not hesitate to charge a premium
for gold. The Reichsbank could at its option issue fiduciary notes upon the