Bimetallism Definition and Historical Perspective

Bimetallism Definition and Historical Perspective 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 â€Å"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  U.S. 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). 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 â€Å"fiat money.† Fiat money, which is what we use today, is money that the government declares to be legal tender, but thats not backed or convertible to a physical resource like metal.  At this time, the government stopped redeeming paper money for gold or silver. The Debate 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. This was controversial for some time, with many arguing that a â€Å"monometal† system limited the amount of money in circulation, making it difficult to obtain loans and deflating prices. This was widely seen by many as benefiting the banks and the rich while hurting farmers and common people, and the solution was seen to be a return to â€Å"free silver†- the ability to convert silver into coins, and true bimetallism. A Depression and a  panic in 1893  crippled the U.S. economy and exacerbated the argument over bimetallism, which came to be seen by some as the solution to all of the United States’ economic troubles. The drama peaked  during the  1896 presidential election. At the National Democratic Convention, eventual nominee  William Jennings Bryan  made his famous  Ã¢â‚¬Å"Cross of Gold†Ã‚  speech  arguing for bimetallism. Its success gained him the nomination, but Bryan lost the election to  William McKinley- in part because scientific advances coupled with new sources promised to increase the supply of gold, thus alleviating fears of limited money supplies. The Gold Standard In 1900, President McKinley signed the  Gold Standard Act, which officially made the United States a monometal country, making gold the only metal you could convert paper money into. Silver had lost, and bimetallism was a dead issue in the U.S. The gold standard persisted until 1933, when the  Great Depression  caused people to hoard their gold, thus making the system unstable; President Franklin Delano Roosevelt  ordered all gold and gold certificates to be sold to the government at a fixed price, then Congress changed the laws that required settlement of private and public debts with gold, essentially ending the gold standard here. The currency remained pegged to gold until 1971, when the â€Å"Nixon Shock† made then U.S. currency fiat money once again- as it has remained since.