Bimetallism and the Gold-Exchange Standard

Abstract

Bimetallism was a metallic system where gold and silver were declared by the government to be standards of value, and unlimited legal tender monies at a fixed ratio. The purpose of bimetallism was to allow both metals to circulate at par and prevent fluctuations in the ratio of gold and silver, which could derange trade. However, fixing any price by the government amounts to fixing the height of the tide. Arbitrage, known as the Gresham’s law, played and made the market choose only one standard, either gold or silver. Bimetallism could not, in practice, be maintained. Eventually, countries had to choose one metal as a standard, the one selected by its domestic market. Many countries demonetized silver in the nineteenth century, which led to exorbitant fall in silver with relation to gold and a detrimental silver depreciation for silver countries. These countries found it necessary to stabilize their currencies vis-à-vis gold; consequently, they had to close the mints for silver, establish a gold fund, and strictly link silver currency to the gold fund movement at a fixed gold-silver rate.