Metallic Standards and Real Exchange Rates

The purpose of this paper is twofold. The first is to provide a general framework of analysis of exchange-rate variations and profitability conditions in bullion trade under monometallic and bimetallic regimes. The second is to offer an example of its application, by constructing the series of the relevant indicator for the London-Paris markets during 50 years of the early history of the Gold Standard. We show that the variation in the market rate of exchange from the relevant parity is a good indicator of the conditions prevailing in the bills market and, therefore, of the state of the balance of payments, provided two conditions are met: first, the parity from which the deviations of the market rate of exchange are calculated must be the parity assumed as the term of reference by economic agents engaged in actual transactions; and second, allowance must be made for the component due to the conditions of the demand for bullion, which can fluctuate widely. We provide, as an example, computation of an indicator which is the measure of the deviation of the market rate of exchange from the real par, which satisfies both requirements. While its sign tells us whether the market is favourable or unfavourable to the domestic currency, its value—compared with the costs of shipping bullion—tells us whether an outflow or an inflow of bullion is likely to occur.