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A bimetallic monetary standard is a combination of two metallic standards, each of which could in principle stand alone, and often evolved into de facto monometallism.

The Nature of Bimetallism

Bimetallic metals are usually gold and silver, but there are exceptions. Ancient Rome was temporarily on a silver-bronze standard; in the 18th century Sweden and Russia experienced a silver–copper standard.

Under bimetallism, both gold and silver coins are full legal tender. The unit of account (dollar, franc, and so on) is defined in terms of a fixed weight both of pure gold and of pure silver. So there is a fixed legal (mint, coinage) gold–silver price ratio: number of grains or ounces of silver per grain or ounce of gold. Both gold and silver enjoy free coinage (the government prepared to coin bars of either metal deposited by any party) and are full-bodied (have legal or face-value equal to metallic value). Token subsidiary (always silver) coins can exist. Subsidiary coins are fractions of (have face value less than) the unit of account; token coins have face value less than metallic (inherent) value, and invariably have restricted legal-tender power. Token coins were not adopted by bimetallic countries until late in their experience with bimetallism, and in conjunction with the process of terminating that standard.

Private parties may melt, import, and export coins (domestic or foreign) of either metal. There is no restriction on non-monetary uses of the monetary metals. Paper currency and deposits may exist; they are convertible into legal-tender coins, either directly or via government-issued paper currency (itself directly convertible into coin). Both private parties and the government may choose the metallic coin, or mixture of coins, in which to discharge debt (including paper currency). However, a private party does not have the right to a direct governmental exchange of gold for silver, or silver for gold. Logically, though, domestic gold and silver coin would exchange privately at the mint ratio.

Advantages and Disadvantages of Bimetallism

Bimetallism has four advantages. First, it embodies two sets of coins – one from a metal with a high value–weight ratio (gold), the other from a metal with a low ratio (silver). These provide a medium of exchange for a wide range of economic transactions. The range can be extended in both directions: upper, via paper currency and deposits; lower, via token subsidiary coins. Neither is incompatible with a bimetallic standard. Second, as does a monometallic standard, the bimetallic standard provides a constraint on the money supply and therefore inflation; for the legal-tender coins constitute the monetary base (given government-issued legal-tender paper, perhaps the ‘super monetary base’), and the government must acquire one or the other metal to increase the base. Because there is coinage on demand, there is also a check on reduction to the monetary base, and on deflation. Third, a bimetallic country or bloc of countries accommodates shocks so that resulting effects on monometallic countries’ money supplies are dampened. This is done by stabilizing the gold–silver price ratio (‘market ratio’) on the world market, the bullion market, where non-monetary gold and silver (generally bars) are traded either among themselves or individually for some important currency. Fourth, in stabilizing the market gold–silver price ratio, the bimetallic country or bloc also stabilizes the exchange rates between ‘gold currencies’ and ‘silver currencies’. Otherwise, these exchange rates would fluctuate, defeating one of the usual purposes of metallic standards.

The alleged disadvantage of bimetallism (relative to monometallism) is that it is unstable. Suppose the bimetallic-country’s mint ratio initially is in the neighbourhood of the market ratio. A shock in the world supply of one metal can change the market ratio so that the mint ratio is now outside its neighbourhood. If the resulting market ratio is above (below) the mint ratio, then silver (gold) is ‘bad’ money, overvalued at the mint; domestic payments will tend to be made in that, relatively cheaper, coin rather than gold (silver), the ‘good’ money, undervalued at the mint and relatively expensive in the market. Good money will tend to be exported to settle balance-of-payments surpluses, bad money imported to finance balance-of-payments deficits. If the divergence between the market and mint ratio is large, ‘bimetallic arbitrage’ occurs, whereby good money is melted and traded on the bullion market for the bad metal, and the bad metal imported to be coined. In both situations, Gresham’s law is operative: bad money drives out good.

Given sustained payments imbalances and/or a large and persistent divergence between the market and mint ratio, bad-money monometallism results. (The good money may be eliminated from the money supply, or circulate at a market-determined value – available only at a premium.) To avoid this, the mint ratio could be altered to remain in conformity with the market ratio. If the mint ratio is under-corrected, monometallism is not stemmed; if the mint ratio is over-corrected, monometallism in the opposite metal can occur. Successive changes in the market ratio can lead to alternating effective gold monometallism and silver monometallism, under the rubric of legal bimetallism. There are costs to such an alternating monetary standard; there are also costs in periodically altering the mint ratio.

Theories of Bimetallic Stabilization

Stabilizing bimetallic arbitrage occurs as follows. Suppose a shock occurs, new gold discoveries, that decrease the market ratio: the market price of non-monetary gold falls relative to silver. The market ratio now is below the mint ratio, so gold is ‘bad’ (overvalued) and silver ‘good’ (undervalued) money. Silver leaves the monetary system to be sold in the world (bullion) market, with gold purchased with the proceeds and coined. First, the arbitrageurs make a profit: the value of the gold coins they obtain is greater than the value of the silver coins they initially sold. Second, there is increased supply of silver (the appreciated metal) and increased demand for gold (the depreciated metal) in the bullion market – the two transactions constituting one arbitrage transaction. The result is an increase in the market ratio, which rises toward the mint ratio. Thus, the incentive for the arbitrage is eliminated. Third, the composition of the money supply of the bimetallic country changed, with a higher proportion of gold to silver. The bimetallic country stabilized the market ratio (and incidentally the exchange rates between gold and silver currencies), via the endogenous gold–silver composition of its money supply.

This mechanism is effective only to the extent that the bimetallic country has sufficient stock of the undervalued metal to return the market ratio close to the mint ratio, so that the incentive to arbitrage vanishes before monometallism in the overvalued metal results. However, the situation is not so dire, because costs of arbitrage imply ‘gold–silver price–ratio’ points that define a band for the market ratio within which the ratio can fluctuate without triggering bimetallic arbitrage. If the bimetallic-country’s commitment to its mint ratio is absolutely credible, then stabilizing speculation exists within the bimetallic-arbitrage band, such that the market ratio turns away from its nearest bound and towards the mint ratio. The situation is analogous to stabilizing speculation within gold-point spreads, under the international gold standard.

Two other forces making for bimetallic stability have been suggested by Marc Flandreau. The first is ‘metal-specific arbitrage’ between the bullion and monetary markets. If a metal depreciates on the bullion market by more than coinage and associated costs, then owners of bars in that metal will coin them in lieu of supplying them to the bullion market. If a metal appreciates by more than melting and associated costs of bringing that coined metal to the market, then holders of coin of that metal will melt them and supply them to the market. The reduced supply of the depreciated metal and increased supply of the appreciated metal act to return the market ratio towards the mint ratio. Unlike bimetallic arbitrage, these are independent transactions. Therefore the costs of metal-specific arbitrage are below the costs of bimetallic arbitrage, and the former provide a ‘metal-specific band’ located within the ‘bimetallic arbitrage band.’ So metal-specific arbitrage is a stabilizing mechanism that becomes operative before bimetallic arbitrage.

The second force involves the bimetallic country (France) transacting with a gold-currency country (England) and a silver-currency country (Germany). There are franc–sterling gold points, and franc–mark silver points. Expressing exchange rates as percentage deviations from parity and specie points in percentage terms, the franc/sterling– franc/mark exchange-rate differential (via triangular arbitrage) proxies the mark/sterling exchange rate. Also, implicit mark–sterling parity (via franc bilateral parities) corresponds to the mint ratio. On the assumption of no bilateral specie-point violations, the mark–sterling exchange rate has as upper (lower) bound the sum (negative sum) of the franc–sterling export (import) point and the franc–mark import (export) point. Now, the mark–sterling exchange rate is itself a good representation of the gold–silver market price ratio, because the Bank of England (Bank of Hamburg) supports, within a narrow band, a fixed sterling (mark) price of gold (silver). For the market ratio above the mint ratio (parity), so that silver is overvalued, the upper bound correctly involves exporting gold (sterling) and importing silver (marks). The gold–silver market price ratio has a bimetallic-arbitrage band that is approximately double the width of the franc–sterling and franc–mark bilateral specie-point spreads. Hence specie flows to settle and adjust payments imbalances occur prior to bimetallic arbitrage.

Suppose that a bimetallic country has lost all its undervalued (‘good’) metal, so it has become monometallic in its overvalued coinage. Nevertheless, Oppers (2000) shows that a bimetallic-arbitrage band could exist, given that there is a second bimetallic country with a different mint ratio. The two countries’ mint ratios each constitute a bound to the market ratio, with, as usual, a market ratio beyond a bound giving rise to arbitrage that returns the market ratio to the band. For this mechanism to operate, both countries must actually or potentially have large amounts of both coined metals in their money stock, where ‘large’ means relative to shocks in the bullion market.

Bimetallism Prior to the 19th Century

The Persian Empire had the first bimetallic standard, with a mint ratio of \( 13\frac{1}{2} \) to 1 (all known mint ratios are in favour of gold) for a long time. This ratio undervalued silver relative to the ratio elsewhere, and presumably merchants took advantage of the price-ratio discrepancies in their regular dealings. The Roman Empire was often gold–silver bimetallic, but periodically debased the coinage. The likely reason was to increase seigniorage rather than to realign the mint ratio in conformity with the market ratio or the mint ratio in other lands. Until the mid-19th century, bimetallism was the legal standard in Europe (including England), though the mint ratio was often altered. Traditionally, the gold–silver price ratio was lower in China and India than in Europe.

England was legally on a bimetallic standard from the mid-13th century, when gold was first coined. The mint ratio was often changed. England was effectively on a silver standard until late in the 17th century, because the British mint ratio was generally below European gold–silver price ratios. Gold coins passed at a market price (in terms of the silver shilling) rather than face value, again indicative of a silver standard. In 1663 the (gold) guinea was coined, with a legal value of 20 (silver) shillings. The silver coins in circulation were in horrible condition, due in part to past debasement, in part to private clipping and sweating of the coins. So the market price of the guinea increased above 20 shillings – to as much as 30 shillings – implying a gold–silver price ratio that effectively overvalued gold relative to Continental ratios. England was in process of switching from an effective silver to an effective gold standard.

In 1696 silver was recoined, so the coins became full-bodied again, and a ceiling (periodically reduced) was placed on the market price of the guinea. The result was that, for a brief period at the turn of the 18th century, England had effective bimetallism, with full-bodied coins of both metals in circulation. However, gold continued to be overvalued and silver undervalued; silver was exported, gold imported; and a de facto gold standard resulted. It became a de jure standard, via legislations restricting the legal-tender power of silver (1774) and effectively ending free coinage of silver (1816).

The Coinage Act of 1792 placed the United States on a legal bimetallic standard. The mint ratio (15 to 1) – selected because it was approximately the market ratio at the time – turned out to overvalue silver, because the market ratio increased. By 1823 gold had virtually gone from circulation, and an effective silver standard resulted. In 1834 Congress increased the ratio to 16.0022 (in 1837, revised slightly, to 15.9884). From 1834 to 1873, the world gold–silver price ratio was consistently below 16, so the new ratio overvalued gold, and an effective gold standard resulted. However, the export of full-bodied Mexican (silver) dollars and US subsidiary silver protected the circulation of underweight foreign silver pieces, which circulated at face value; so in a sense effective bimetallism continued. Only in the early 1850s, when the market gold–silver price ratio fell (due to gold discoveries and new production), did the United States begin to lose its remaining silver coins. In 1853, to retain the silver, Congress reduced subsidiary coins (below a dollar) to token status, with limited legal-tender power. The United States now was on a de facto gold standard. Legal bimetallism remained until 1873, when coinage of the silver dollar was terminated. One year later, silver was virtually demonetized; all silver coins (including the dollar) were restricted to maximum legal tender of five dollars in any payment.

Bimetallic France in the 19th Century

In 1803 France made the franc the monetary unit, and solidified and made effective the mint ratio of \( 15\frac{1}{2} \) that had been established in 1785. From the end of the Napoleonic Wars until 1873, while France retained that bimetallism, the market gold–silver price ratio remained in the neighbourhood of \( 15\frac{1}{2} \). (Also, exchange rates among gold, silver, and bimetallic countries were stable.) The stability of the market ratio was remarkable in the face of severe shocks to the bullion market. In the 1850s gold production increased tremendously due to gold discoveries in California and Australia, putting strong downward pressure on the market price ratio. In the 1860s gold production stopped increasing, and exploitation of Nevada silver discoveries put strong upward pressure on the ratio.

The steady market gold–silver price ratio was due primarily to the continued bimetallism of France, which acted as a buffer to shocks and thus stabilized the gold–silver market price ratio. What gave France this power were its large economic size, the substantial amounts of both gold and silver coins in its circulation, and its credible commitment to bimetallism at an unchanged mint ratio. Therefore, French bimetallic arbitrage operated – in the 1850s and early 1860s via gold imported and coined and silver melted and exported, in the later 1860s via the opposite activities. Stabilizing speculation within the bimetallic-arbitrage band, stabilizing bilateral specie flows, and metal-specific arbitrage were also elements in the French stabilization service. In 1865 the French stabilizing force was enhanced by formation of the Latin Monetary Union (LMU), in which France, Belgium, Switzerland, and Italy adopted a common bimetallism.

Some scholars, especially Oppers (1995, 2000), believe, rather, that France underwent serial monometallism, with bimetallism transformed to a de facto silver standard in the 1830s and 1840s, and the latter yielding to a de facto gold standard in the 1860s. Yet a parity band (with stabilizing speculation within the band) existed, with the French mint ratio the lower bound and the US mint ratio the upper bound in 1834–61, followed subsequently by the French ratio the upper bound and the Russian ratio the lower bound. This interpretation of history is doubtful, for the strong propensity to use both metallic currencies was characteristic only of France. Also, Russia’s mint ratio was inoperative at the time, as the country had an inconvertible paper currency.

In the early 1860s the future LMU countries, if not on a de facto gold standard, were certainly moving towards it. With the market ratio below the mint ratio, silver was being lost. To protect silver circulation, the individual countries made subsidiary coins token currency; while in 1866 the LMU came into effect, mandating reduction of the silver content and restriction of the legal-tender power of all silver coins except the largest, that is, the five-franc piece, which remained full-bodied.

French, LMU, and world bimetallism ended in the 1870s. The proximate cause was Germany’s move to a gold standard, financed by the French indemnity that resulted from the Franco–Prussian War. Germany’s release of silver put upward pressure on the gold–silver market price ratio. France was not prepared to accept the gold loss and silver inflow that would result from continued adherence to bimetallism. France (and Belgium) limited silver coinage in 1873, followed by the LMU mandating limits on coinage of the five-franc silver piece in 1874–6. In 1878 coinage of that piece was terminated. The existing five-franc coins retained full legal-tender power. France, along with Belgium and Switzerland, went on a ‘limping’ gold standard, redeeming government-issued paper money in either gold or silver at the discretion of the authority.

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