What Is the Bimetallic Standard?
A bimetallic standard is a monetary system in which a government recognizes coins composed of gold or silver as legal tender. The bimetallic standard (or bimetallism) backs a unit of currency to a fixed ratio of gold and/or silver.
How the Bimetallic Standard Works
The bimetallic standard was first used in the United States in 1792 as a means of controlling the value of money. For example, during the 18th century in the United States, one ounce of gold was equal to 15 ounces of silver. Therefore, there would be 15 times more silver (by weight) in $10 worth of silver coins than $10 worth of gold coins. Adequate gold and silver were kept in reserves to back the paper currency. This bimetallic standard was used until the civil war when the Resumption Act of 1875 stated that paper money could be converted to gold.
Proponents of the bimetallic standard argued that it steadily increased the money supply which would stabilize the economy. The gold rush of the late 19th century, which increased the supply of gold, put this argument to rest and essentially turned it into a historical and academic argument.
Economist Milton Friedman believed that abolishing the bimetallic standard increased the volatility in financial markets more than it would have should the U.S. stayed on the bimetallic system.