What Is the Bimetallic Standard?
A bimetallic standard, or bimetallism, is a monetary system in which a government recognizes coins composed of both gold or silver as legal tender. The bimetallic standard backs a unit of currency to a fixed ratio of gold and/or silver.
The mint ratio, or gold/silver ratio, is the price of an ounce of gold divided by the price of an ounce of silver, and is the exchange rate between the two precious metals. In a bimetallist system, the mint ratio would be fixed by the government at a particular exchange rate, which could be adjusted from time to time in response to market forces.
- Governments who officially recognize both gold and silver coins as legal tender follow the bimetallic standard as their monetary system.
- Central banks were in charge of setting or fixing the gold/silver ratio under bimetallism, which provided stability to the currency markets.
- Under the gold standard, only gold is legal tender and the gold/silver price ratio freely floats.
- The bimetallic standard was utilized by the United States briefly during its early years as a republic through to the civil war.
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.
While the officially adopted silver-to-gold parity ratio of 15:1 accurately reflected the market ratio at the time, after 1793 the value of silver steadily declined, pushing gold out of circulation, according to Gresham's law. This is a monetary principle stating that "bad money drives out good," which means that people will prefer to hoard gold and use silver currency in exchange - even if they have the same minted face values. The result is that gold coins become relatively scarcer and thus more valuable despite their stated worth.
Bimetallism vs. the Gold Standard
The gold standard is a fixed monetary regime under which the government's currency is fixed and may be freely converted into gold only. Under the gold standard, there is no pre-established ratio between gold and silver, and the price of silver vis-a-vis gold essentially floats freely on the market.
After WWII, the Bretton Woods agreement forced Allied countries to accept the U.S. dollar as a reserve rather than gold, and the U.S. government pledged to keep enough gold to back its dollars. In 1971, the Nixon administration terminated the convertibility of U.S. dollars to gold, creating a fiat currency regime. The gold standard is not currently used by any government. Britain stopped using the gold standard in 1931 and the U.S. followed suit in 1933 and abandoned the remnants of the system in 1973.