Bimetallism
Bimetallism is a monetary standard in which the currency unit is defined by fixed amounts of both gold and silver, and the mint coins both metals at a legal ratio. It works only while that legal ratio stays close to the market price of the two metals.
Also called: bimetallic standard · double standard · gold and silver standard · mint ratio
Under bimetallism the law sets a mint ratio: how many ounces of silver count as equal to one ounce of gold. In the United States the dollar was defined from 1792 so that the ratio was 15 to 1. The Coinage Act of 1834 moved it to about 16 to 1, and by the 1840s a dollar meant either 371.25 grains of silver or 23.2 grains of gold.
The weakness is that the market ratio moves and the legal one does not. Whichever metal the mint undervalues is worth more as bullion than as coin, so it is exported, melted or hoarded: Gresham's Law in its most mechanical form. Between 1792 and 1834 the 15-to-1 ratio undervalued gold, and gold coin left American circulation. After 1834, and especially once Californian gold pushed down the price of gold from 1849, silver became the undervalued metal. In 1850 and 1851 the United States exported US$25 million more silver than it imported, and small change ran short.
By the end of the nineteenth century most major economies had moved to the gold standard. The lesson carries over to any system that fixes the price of two assets against each other, such as a currency peg or a token redeemable at par: when the official rate drifts from the market rate, the undervalued asset drops out of use and arbitrage traders take the gap.
In practice
A bimetallic standard was hard to hold in one country alone, because foreign mints using different ratios gave traders a ready market for whichever metal was undervalued at home.
Example
The mint values one ounce of gold at 15 ounces of silver; the market pays 16. A trader melts gold coins containing one ounce, sells the gold for 16 ounces of silver, and has the silver coined. The new coins have the face value of about 1.07 ounces of gold, a gain of roughly 6.7 percent before costs, repeated until gold coins have gone.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Bimetallism, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Gold standard | A gold standard defines the currency in gold alone, with silver used only for token coins. Bimetallism defines it in both metals at a fixed ratio. |
See also
- Gresham's LawGresham's Law is the tendency for overvalued money to stay in circulation while undervalued money is hoarded, melted or exported, when the law forces both to be accepted at the same face value. It is usually summarised as 'bad money drives out good'.
- Gold StandardA gold standard is a monetary system in which a currency is defined as a fixed weight of gold and the issuer promises to convert its notes or deposits into gold at that price, tying the supply of money to the stock of gold.
- Legal TenderLegal tender is money that a creditor must accept in settlement of a debt, so that a debtor who offers it in full cannot be sued for non-payment. It does not oblige a shop or anyone else to accept that money for a purchase.
- ArbitrageArbitrage is buying and selling, or borrowing and lending, the same or closely equivalent things at the same time in different markets to profit from a difference in price. By exploiting such gaps, arbitrage tends to close them.
- Currency PegA currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.