Understanding Bimetallism

Bimetallism is a monetary policy wherein the value of a currency is linked to the value of two metals, usually (but not necessarily) silver and gold. In this system, the value of the two metals would be linked to each other—in other words, the value of silver would be expressed in terms of gold, and vice versa—and either metal could be used as legal tender. 

Paper money would then be directly convertible to an equivalent amount of either metal—for example, U.S. currency used to explicitly state that the bill was redeemable “in gold coin payable to the bearer on demand.” Dollars were literally receipts for a quantity of actual metal held by the government, a holdover from the time before paper money was common and standardized.

History of Bimetallism

From 1792, when the US Mint was established, until 1900, the United States was a bimetal country, with both silver and gold recognized as legal currency; in fact, you could bring silver or gold to a U.S. mint and have it converted into coins. The U.S. fixed the value of silver to gold as 15:1 (1 ounce of gold was worth 15 ounces of silver; this was later adjusted to 16:1).

How to Calculate a Standard Deviation

One problem with bimetallism occurs when the face value of a coin is lower than the actual value of the metal it contains. A one-dollar silver coin, for example, might be worth $1.50 on the silver market. These value disparities resulted in a severe silver shortage as people stopped spending silver coins and opted instead to sell them or have them melted down into bullion. In 1853, this shortage of silver prompted the U.S. government to debase its silver coinage—in other words, lowering the amount of silver in the coins. This resulted in more silver coins in circulation.

While this stabilized the economy, it also moved the country towards monometallism (the use of a single metal in currency) and the Gold Standard. Silver was no longer seen as an attractive currency because the coins were not worth their face value. Then, during the Civil War, hoarding of both gold and silver prompted the United States to temporarily switch to what’s known as “fiat money.” Fiat money, which is what we use today, is money that the government declares to be legal tender, but that’s not backed or convertible to a physical resource like metal. At this time, the government stopped redeeming paper money for gold or silver.

After the war, the Coinage Act of 1873 resurrected the ability to exchange currency for gold—but it eliminated the ability to have silver bullion struck into coins, effectively making the U.S. a Gold Standard country. Supporters of the move (and the Gold Standard) saw stability; instead of having two metals whose value was theoretically linked, but which in fact fluctuated because foreign countries often valued gold and silver differently than we did, we would have money based on a single metal that the U.S. had plenty of, allowing it to manipulate its market value and keep prices stable.

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