Bimetallism

Bimetallism

Under a bimetallic standard, a unit of money, such as a dollar, is defined in terms of two metals, usually gold and silver. The United States started out on a bimetallic standard that defined a dollar as equal to either 371.25 grains of silver or 24.75 grains of gold, fixing the relative value of silver to gold at 15 to 1. Bimetallic monetary standards date to the ancient world, and after the twelfth century they are well documented in European history. The use of two metals instead of one appeared as a reasonable means of supplementing money supplies.

A bimetallic monetary standard owes its complexity to the relationship between the price of metals fixed at a mint and the freely fluctuating market price of metals. A bimetallic system functions smoothly in the rare instance in which the market price and the mint price remain equal.



The true nature of a bimetallic standard is best examined when mint prices and market prices vary. If the mint ratio of silver to gold is 15 to 1 and the free market ratio is 16 to 1, citizens have an incentive to take silver to the mint for coinage, convert the silver coins into gold coins, and exchange the gold coins for a larger amount of silver on the free market. According to the theory of bimetallism, the actions of the mint in buying silver will lift the value of silver in the free market, reducing from 16 units to 15 units the amount of silver equal to a unit of gold in the free market. In thirteenth-century Genoa and Florence, a bimetallic system appeared to work according to the theory that market prices will gravitate toward mint prices.


Subsequent experience suggested that bimetallic systems do not work as the bimetallic theory suggested. Between 1792 and 1834 in the United States the mint ratio of silver to gold was 15 to 1 while the free market ratio was 15.5 to 1. This discrepancy between mint prices and market prices led to the disappearance of gold from circulation, because no one had an incentive to bring gold to the mint for coinage. Valued in silver, gold was worth more on the open market than at the mint. When Congress tried to remedy the situation by boosting the mint ratio to 16 to 1, above the free market ratio of 15.5 to 1, gold replaced silver as circulating money. Gold rather than silver was brought to the mint for coinage, and the United States began moving toward a gold standard. Under a bimetallic system, experience taught that the metal overvalued at the mint, compared to the free market, tended to drive the other metal out of circulation as predicted by Gresham’s law.


The last half of the nineteenth century saw a vigorous rivalry develop between bimetallism and the gold standard. The United States and France were the strongest supporters of bimetallism, and England championed the cause of the gold standard. The difficulties of keeping mint prices and market prices in line were a severe drawback to bimetallic standards, and the major trading partners of the world turned to the gold standard toward the end of the century.