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

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.