By the end of the nineteenth century, the unilaterally adjusted monetary statutes of many nations around the world had created a set of conditions for the minting and circulation of two distinct metallic mediums of exchange: gold and silver. Countries that allowed the simultaneous circulation of gold and silver both as acceptable units of currencies in their economies were operating under a system that was known as “bimetallic standards.” At the time, with the exception of Britain and France, almost all of the European countries were operating on silver standards. In essence, Britain had differed from other countries that have previously adopted the silver standard mainly because the British economy had been using gold as the standard currency from the start of the century.
Similarly, France was also an exceptional case in this era since the French monetary laws were representative of bimetallic statutes. However, the privilege of allowing the simultaneous circulation of both gold and silver presented its own challenges.
A significant historical example of this dilemma was during the last years of the nineteenth century when 14.5 ounces of silver were being traded roughly for an ounce of gold in the market place in France.
From time to time, whenever the price of gold in the world market rose more than that of silver’s, let us say up to a point where 15 ounces of silver were being traded in exchange for an ounce of gold, then such a market price of gold would create an incentive for arbitrage. Thus, the arbitrager would have a window of opportunity to be able to import at the previous quantity of “14.5” ounces of silver and have it coined at the mint price. Then initially, that silver coin would be traded in exchange for an ounce of gold and the gold (i.e. the extra half ounce of silver) that the arbitrager had earned in the domestic market would be exported at a cheaper rate and a be sold for 15 ounces of silver on foreign markets.
Ultimately, the arbitrager would continue to export gold and double his earnings insofar as the market ratio had stayed considerably above the mint ratio.
Conversely, if the market ratio were to fell below the mint ratio (i.e. after a few discoveries of new gold reserves) then arbitragers would import gold and export silver. This window of opportunity was called the “