Competing Bimetallic Ratios: Amsterdam, London, and Bullion Arbitrage in Mid-Eighteenth Century

Abstract

 PILAR NOGUES-MARCOThis article analyzes the stability of bimetallism for countries operating in integrated bullion markets that enact different legal ratios. I articulate a new theoretical framework to demonstrate that two countries can both be bimetallic only if they coordinate their legal ratios. The theoretical framework is applied to the mid-eighteenth century when London's legal ratio was 3.8 percent higher than that of Amsterdam. I find that Amsterdam was effectively on the bimetallic standard, whereas London was on a de facto gold standard.arly modern monetary policy is fascinating. It is also complex, involving interactions between mints, banks, and treasuries, and arbitrageurs in domestic and international markets. It is also understudied although eighteenth-century policies remain relevant today. In fact, the motivations of important actors and the market environment in which they operated are much less understood than their more familiar nineteenth-century counterparts. For instance, it is commonly believed that Sir Isaac Newton, Master of the Mint, mistakenly overvalued gold at the mint in 1717 (Jastram 1977, pp. 12-13; Cooper 1987, pp. 44-45; Kindleberger 1993, p. 60; Redish 1990, pp. 789-90; Eichengreen 1996, p. 12). What exactly is meant by this statement? What were the reasons for this "mistake," and what were its implications?This article reconstructs the relevant aspects of international monetary relationships during the eighteenth century. Doing so, helps us understand the operation of bullion markets during the eighteenth century

International credit market integration in northwestern Europe in the 1670s

“…Although the transaction cost of arbitrage exhibits a downward trend between the sixteenth (4 per cent) and nineteenth centuries (0.5 per cent), the transaction cost of arbitrage estimated in this article is relatively low compared to that available in the existing literature (Nogues-Marco 2013, pp. 21–3; Li 2015, p. 1219; Bignon et al 2017, pp.…”

“…Well-integrated and efficient financial markets promote resource allocation and facilitate economic development. The integration of European financial markets in the eighteenth and nineteenth centuries has been quantitatively analysed, establishing that European financial markets were already highly integrated and efficient in exploiting arbitrage opportunities (Schubert 1989; Neal 1990; Flandreau et al 2009a; Nogues-Marco 2013; Bignon et al 2017). Since the seventeenth century, bills of exchange were commonly discounted and assigned to a third party with endorsement.…”

Origins of arbitrage

“…Comparison with bimetallic arbitrage of later ‘metallist’ periods (e.g. Friedman 1990; Nogues-Marco 2013) reveals key incentives for trading arising from the presence of sufficient difference across locations between the fixed legal exchange rate for gold and silver coinage and the variable market agio for exchanging bullion. Absent merchant mint access combined with a ‘caged’ monetary system, such bimetallic arbitrages were not possible.…”

Monetary Systems and the Global Balance of Payments Adjustment in the Pre-Gold Standard Period, 1700–1870

“…It is commonly believed that Sir Isaac Newton, Master of the Mint, mistakenly overvalued gold at the Mint in 1717. 4 However, Nogues-Marco (2013) demonstrated that the London bimetallic ratio remained too high not because of Newton's 'mistake', but because Parliament did not alter the monetary standard of England, as Newton proposed, to adjust the legal ratio to the European market ratio. Parliament decided 'that no Alteration be made in the Standard of the Gold and Silver Coins of this Kingdom, in Fineness, Weight or Denomination'.…”