The current fascination with globalization compares with the first great era of globalization, from the middle of the nineteenth century through to August 1914. For the earlier period, the international gold standard is generally seen as the unifying money machine, with stable exchange rates that undergirded the huge expansion in world trade and capital flows. But gold only became the dominant international standard by the mid-1870s. Before that, conventional thinking (including my own before reading this excellent book) saw only a confusing mélange of bimetallic or inconvertible paper standards.

However, Flandreau shows that the era of bimetallism from 1848 to 1873, during which France owned almost half of the world's stocks of both gold and silver, provided more stable exchange rates and better international macroeconomic stability than did the pure gold standard that succeeded it. Flandreau carefully documents his theory for the period from 1848 to the “crime” of 1873, when France suspended the free coinage of silver and moved towards a gold standard.

Gold and silver have extensive nonmonetary uses, both industrial and decorative. They are also subject to substantial supply shocks from new ore discoveries or innovations in mining technologies. To the casual observer, the natural market price ratio between gold and silver is dominated by these fluctuating nonmonetary demands and supplies. According to conventional wisdom, if any one monetary authority chooses to fix the relative price, say, at 15.5 ounces of silver to 1 ounce of gold as the French government did, the price would be naturally unstable. If the notional “market” price of gold rose to say 16.5, people would proffer only silver to mint and thus put the whole regime on a silver standard. Or, if the notional market price fell to 14.5, only undervalued gold would be proffered (Gresham's Law), putting the whole regime on the gold standard. Reinforcing this conventional idea that bimetallism was subject to such knife-edge instability is the quaint story of Sir Isaac Newton. When master of the Royal (British) Mint in 1717, Newton “mistakenly” underpriced gold in terms of silver and thus accidentally put Britain on the gold standard—on which it remained (except for major wars) until 1931.

However, the core of Flandreau's book is to show that this knife-edge instability is not a general characteristic of bimetallism. Once monetary stocks of gold and silver become substantial, he shows theoretically (chapter 1) that there can be a fairly wide variance in the ratio of an economy's total stock of silver to that of gold consistent with the government fixing the price ratio at 15.5—as the French government did until 1873. Then, in subsequent chapters, he shows that French stocks of monetary gold and silver were indeed large, not only relative to nonmonetary uses in France, but relative to those of neighboring countries such as Britain as well as Germany, which was more or less on a silver standard before 1873. Austria and major Asian countries such as India and China were also mainly on silver. In France, monetary circulation outside the central bank was heavily metallic, unlike in Britain, where deposit money and banknotes had become more common. Because of the large stocks of (private) monetary gold and silver circulating in France, it became the center of arbitrage for fixing exchange rates between the silver bloc countries to its east and the more developed gold bloc countries to its west—with little or no orchestration needed from the Banque de France. Indeed, before 1873, the world seemed to have more broadly stable exchange rates linking Asia and Europe than subsequently, when a monometal gold standard became dominant outside of Asia.

True, understanding the details of how this arbitrage worked requires mind-numbing knowledge of the interactions between gold points and silver points, through which Flandreau carefully guides the reader. The minting of coins was largely farmed out to the private sector. But the range of exchange-rate variation was small, with gold or silver specie being the automatic means of settlement between the major financial centers.

Surprisingly, this worldwide bimetallic system was resilient to macroeconomic shocks. For example, major discoveries in California and Australia in the 1850s into the 1860s flooded the system with newly mined gold, but the inflationary consequences were ameliorated by adjustments in private monetary circulation—largely in France. In one of the book's most fascinating chapters, Flandreau documents how gold coins began to replace silver coins—starting first in Paris and then only slowly filtering out to the French provinces. Because gold and silver shocks were generally uncorrelated, and because the total monetary base of both metals was very large, supply shocks were naturally dampened better than they were under the pure gold standard that followed.

Why then did bimetallism come to an end? Flandreau recognizes but somewhat discounts the standard argument that it was more convenient to have just one metal as the unit of account—or that there was a natural progression from base metals or cowrie shells to silver and then to gold. Rather, he sees the sudden demise of bimetallism as an accidental consequence of the Franco-Prussian War of 1870 when France had to pay a huge indemnity to Germany. Germany then used it to build up its monetary base in gold in order to join the gold standard, but then attempted to unload all of its now-surplus silver in the Paris market. Worried about capital losses if they suddenly accumulated huge amounts of silver, the French authorities then restricted the free coinage of silver, and the open-market gold price of silver specie then suddenly fell, and with it Asian exchange rates. More generally, the European and American economies paid a rather heavy price from the demonetization of silver because of the consequent fall in their collective monetary base and the deflationary pressure from the 1870s to the mid-1890s—sometimes called the world's first great depression.

Flandreau's book, first published in French in 1995, is a must read for all serious students of international monetary history.