Gold, silver, and the Glorious Revolution: arbitrage between bills of exchange and bullion
Between i688 and I700 England's monetary system suffered a deep crisis. Coins were clipped and silver was exported. The price of gold coins increased by 40 per cent while the value of the pound collapsed on the international exchanges. These conditions resulted from a process of arbitrage between bills of exchange and bullion following the exogenous shock of financing England's entry into the Nine Years War in i689. Arbitrage between bills of exchange and bullion rather than arbitrage between gold and silver formed a mechanism whereby shocks to international exchange rates were transmitted to England's monetary stock. This article presents market behaviour consistent with arbitrage between bills and bullion that marks a degree of international market integration during the late seventeenth century which has been statistically verified only for the eighteenth century. The micro-level financial innovations necessary for this successful arbitrage are then examined in the actions of a prominent London banker. A result of arbitrage between bills and bullion was an international flow of one metal with no offsetting flow of the other. Although other authors have considered the interplay between bills and bullion at this time, they do not develop explicitly the interaction of the three markets in an explanatory framework.2 Hence, the period has lacked a single, consistent framework for reconciling times of gold inflows into England with times of silver outflows. Clarifying how international markets transmitted shocks explains the crisis that followed the Glorious Revolution and led to permanent changes in England's monetary regime. England had been on a silver standard for centuries prior to the i69os. In response to gold's high price and silver's massive exportation, Parliament legally set a unit of account value for gold coins which marked the beginning of a bimetallic regime that lasted for over a century.3 The results of arbitrage were a precondition for this political action.4 Along with a bimetallic standard (both silver and gold