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Forex: The Valuation of Foreign Stocks
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The Gold Supply in Forex

Every transaction in Forex is in terms of some "unit of account" (pound, dollar, mark, franc, etc.), representing a fixed weight of gold or silver, and every piece of paper gives its possessor the right to obtain metal disks, if so wished.

In domestic affairs, the timid prefer the chink of coins to the crackle of paper, and in times of crisis most people are timid. In foreign transactions a debt could be paid, or a transaction made, by shipping coin or bullion, if bills of exchange or drafts could not be bought at a reasonable price. Precious metal was thus the foundation of the commercial and credit structure, even if people rarely went into the basement to look at it.

A strengthening of that foundation was essential as the weight of the superstructure increased. During the second half of the eighteenth century there was a great revival of silver production, and a considerable output of gold from Brazil. The silver spread over Europe, or went to the Orient; the gold tended to reach London. During the war years coins gave place to paper money in the belligerent lands, and when currencies were restored to convertibility, only Britain went onto a gold standard.

The export drain on Britain's far-from-ample gold supply helped to precipitate the crises of 1825, 1836, and 1847. In continental countries a bimetallic standard might prevail, as in France, where an ounce of gold was decreed to be worth 15.5 ounces of silver - but, few gold coins circulated.

In Belgium, Switzerland, and Italy, silver was the officially favored metal, and when Holland, in 1847, abandoned bimetallism for silver monometallism, she seemed to be voicing the continent belief that gold was too scarce to be useful as a currency basis.

The new gold made the spread of the gold standard possible, since there was now enough metal for currency and bank reserves. The gold flood also made the abandonment of bimetallism inevitable, for it was impossible to maintain a fixed legal ratio between the two metals.

A government could decree that, within its boundaries, an ounce of gold was worth 15 ounces of silver, and that the gold in one twenty-franc piece was equal in value to the silver in twenty one-franc coins.

In the world's bullion market, gold sank in price, as it became more plentiful. In 1848, an ounce of gold cost 15.85 ounces of silver, but in 1850 one could buy it for 15.19 ounces; or, to put it another way, 10.17 silver francs would buy the gold that was in a twenty-franc gold piece.

If bimetallism was to be maintained, the gold coins would've had to have been re-minted, and given a larger gold content, to restore their value. This was impracticable, as it would have to be done frequently to keep up with every change in the relative value of the two metals. The alternative was to abandon the double standard.

France, its franc-using allies (Belgium, Switzerland), and Italy, tried to devise a modified bimetallism, but when the German Empire, in 1872-1874, established its currency on a gold standard, the silver cause was lost. Scandinavia, Holland, Austria-Hungary, Russia, the United States, and Japan, soon joined the ranks of gold, and in 1878 the franc-using countries suspended the free coinage of silver.

Eventually only Ethiopia and China were left on the silver standard. Mussolini crossed the silver off the list in 1936, and, at almost the same moment, American policy had raised the price of silver so high that China could not afford to retain it as the basis of its currency.