Bimetallism

Angela Redish, University of British Columbia

A bimetallic monetary standard can be defined as one in which coins of two different metals are legal tender. Such standards were commonplace in Western economies throughout most of the last millennium, although their details differed. Under a typical bimetallic standard coins of gold and silver were produced by the Mint under orders of the sovereign, and they were given exchange values that reflected their intrinsic value. For example, in the late eighteenth century the US established a coinage system comprising a silver Dollar, containing 371.25 Troy grains of silver, and a gold Eagle containing 247.5 Troy grains of gold. The relative market values of gold to silver at that time were 15:1, and the legal tender value of the silver dollar was $1 and of the Eagle was $10, reflecting their relative values (ten silver Dollars would contain 3712.5 grains of silver, which is 15 times the 247.5 grain weight of the gold Eagle).

The mint typically bought gold and silver freely that is, from anyone willing to sell at the mint price, which usually was slightly lower that the value of the coins produced, to pay for the costs of coining and, sometimes, profits or seignorage as well. As in the case of the gold standard – a more well-understood commodity money standard – bimetallism provided a nominal anchor for the monetary system. The price of gold and silver were determined by their relative supply and demand (both monetary and non-monetary) and this determined the stock of money and the general price level.

In a world where the principal components of the money stock were full-bodied coins (that is, the coins circulated at roughly their intrinsic value, and there were no bank notes) bimetallic standards had the merit that they enabled currencies to have coins for high and low valued transactions without having exceptionally large or small coins. There was, however, a difficulty with bimetallic standards. If coins were to be given values according to the relative market value of gold to silver a change in the market value of the metals would disrupt the monetary system. Essentially one of three things would happen. Firstly, the coin whose relative market value had risen could be withdrawn from circulation making the monetary system either all gold or all silver. This phenomenon is predicted by Gresham’s Law – bad money drives out good – named after Sir Thomas Gresham, the advisor to Elizabeth I of England, who noted the behavior in the sixteenth century. Another possibility was that both gold and silver coins would continue to circulate but not at par values: the coin whose value had risen would circulate at a premium. Finally, perhaps the coins would both continue to circulate at par. The debate over which of these possibilities was in fact more prevalent, and in theory more likely, continues.

Europe during the Dark Ages minted only silver coins – and only pennies made of debased (low purity) silver at that. With the rise of commerce in the Mediterranean, a need for larger denominations and a more reliable medium of exchange emerged leading to the minting of first pure silver coins and then gold coins. The gold coins were first minted in Florence – the well-known Florin and in Venice – the Ducat – in the mid-thirteenth century. Many other countries also introduced their own gold coins, but the Florin and Ducat became the dollar of their time, and were used in global commerce at least until the sixteenth century. Meantime most local or retail trade was conducted in the locally produced silver coinage.

At the beginning of the nineteenth century most Western economies used bimetallic standards, but by the end of the century the gold standard – that is, a monometallic standard – covered the West and much of the rest of the global economy. There is now a considerable literature on why this transition occurred, and on its merits.

The underlying factors affecting the choice of monetary standard were technological change and globalization. In the early nineteenth century steam engines were harnessed to rolling mills and coining presses. This mechanization made it possible to produce coins that were virtually uniform in dimension and that had very high definition impressions on their faces. Such coins were much more difficult to counterfeit so that it became feasible to produce coins that were not full-bodied and yet would not be counterfeited. Similarly convertible bank notes became more common as a medium of exchange. Both factors meant that it was possible to have high and low denomination money without bimetallism. In the early nineteenth century Britain formally rejected bimetallism and fixed the value of the pound in terms of its gold content only.

The nineteenth century saw dramatic reductions in transportation costs and a resulting integration of economies that is only now being recreated. This raised the benefits of a common currency, indeed in the 1860s a world monetary conference endorsed a world money based on a gold coin. (The proposal was not ratified and fell victim to the Franco-Prussian War!) The choice of gold may have reflected its higher value – more prestige – and the desire to emulate the economic successes of Britain.

However, the major transition occurred between 1850 (when only Britain and Portugal were on the gold standard) and 1880 by which time the US and almost all of Western Europe had adopted gold. A key factor in this timing was the California gold rush in the mid-nineteenth century. This increased the world gold supply and caused a fall in the relative price of gold. As Gresham’s law predicted, the result was a withdrawal of silver from circulation both in the US and in Europe. Gold became the de facto money as it became unprofitable to sell silver to the Mint. In earlier times the monetary authorities would have responded by altering the weight of the gold coins, however, in the environment of the mid-nineteenth century, the response was to provide low-value coins by producing token coins on government account.

In the US subsidiary token coins were introduced in 1853 and in 1873 Congress passed a new Coinage Act that precluded the minting of the silver dollar. The silver dollar had not in fact been minted for decades but the Act was subsequently derided as the Crime of ’73 on the grounds that it had inadvertently led to the adoption of the gold standard. Belgium, Italy and Switzerland, whose gold and silver coinages were identical to that of France each adopted different subsidiary coinages, but in 1865 joined with France to form the Latin Monetary Union (LMU) to create a uniform subsidiary coinage. In 1870 newly unified Germany adopted the gold standard and financed the acquisition of gold (i.e. sale of the existing silver coins) through the indemnity it imposed on France at the conclusion of the Franco-Prussian War. In order to avoid providing a sink for German silver the French refused to buy silver, leading all the LMU countries to abandon bimetallism.

Although the gold standard was entrenched by 1880, during the last two decades of the nineteenth century, there were attempts in both the US and Europe to return to bimetallism. The arguments were both theoretical and partisan. A significant motivation was the rise in the price of gold after 1870 (in part due to the increased monetary demands for gold) which generated a secular deflation. Furthermore new silver discoveries reduced the price of silver, so that if the previous bimetallic standards had remained in place there would have been an inflation.

In the US Westerners with nominal debts, who felt penalized by the deflation, supported William Jennings Bryan who campaigned for the Presidency in 1896 on the slogan that Americans should not be “crucified on a cross of gold.” However, Bryan lost the election and gold discoveries in the late 1890s generated a gradual inflation, and in 1900 the US adopted the Gold Standard Act cementing the adoption of the gold standard.

In Europe the debate focused on the welfare properties of bimetallism, with advocates arguing that international bimetallism – in which all countries adopted the same relative prices for gold and silver – would alleviate the problems associated with Gresham’s Law, and that bimetallism would promote greater price stability than the gold standard provided. The LMU countries were at the forefront of the promotion of bimetallism, but Britain and Germany were never really on board, and the requisite degree of international co-operation was not forthcoming. By 1900 bimetallism was dead.

Angela Redish, University of British Columbia

Further Reading