Bimetallism is the name given to a monetary system in which both gold and silver are on precisely the same footing as regards mintage and legal tender. At present, in the United Kingdom, gold to any amount can be brought to the mint and coined into sovereigns free of charge, and the legal definition of the pound sterling is a certain weight of gold of a certain fineness, &c.; and gold, and Bank of England notes representing gold, are the sole legal tender to any extent.
The silver coins of this country are at present only 'token' coins. The value of the silver of which they are made (even at the valuation before any depreciation of silver relatively to gold occurred) is below the nominal value—i.e. the silver in twenty shillings (reckoning silver as worth about 60 pence, or a quarter of a sovereign, an ounce) is not worth the gold in a sovereign. As a consequence the silver is coined only in limited quantities, and is legal tender only to the extent of forty shillings. This preliminary explanation is necessary, because it is often said in a loose inaccurate way that bimetalism exists de facto everywhere, because all nations use both gold and silver for coinage.
There is, however, a fundamental difference between standard coin and token coin. If by great discoveries of gold, or by the opening up of hoards in the East under civilising influences, the amount of gold brought to the mints were increased to a great extent, then there would follow a general rise in prices. This depends upon the principle that, other things remaining the same, an increase in the quantity of money will raise general prices. The only object of converting the gold into coins is to use the coins to spend, and the increase in spending power tends to force up prices. The theory is confirmed by the effects of the great discoveries of gold in Australia and California about 1850. Similarly, in the 16th century, when silver was standard money, the discovery of the rich mines of Potosi caused a great rise in prices.
But if under present conditions, in which no civilised nation coins silver to an unlimited extent, there were similar discoveries of silver, there would be no corresponding effect on prices. The only effect would be that silver would, reckoned in gold, become cheap or depreciated. The coinage, however, would not be increased, because the use of silver is strictly limited. If silver were a standard coin, then it would be coined in unlimited amounts, and when expended would tend to raise the prices of commodities. The principle may be expressed thus: The quantity of standard money, other things remaining the same, determines the general level of prices, but the quantity of token money issued is determined by the general level of prices. When prices are high, ceteris paribus, more token money will be required as a circulating medium than when prices are low.
If we consider any particular country, the principal difficulty in the adoption of both metals as a joint standard is generally expressed by saying that the joint standard or double standard (to use the more familiar but less accurate term) would be in reality a fluctuating single standard. It is argued that, considering the variations in supply and demand of the two metals, variations must constantly occur in the relative market values of gold and silver considered as bullion. At the same time, it is said, if both are coined in unlimited amounts for unlimited payments, some definite legal ratio must be adopted at which they are to be coined and to circulate. If a contract for so many pounds can be fulfilled by the payment of either gold or silver, it must be assumed that in some way the equivalent amounts are determined.
But suppose, when large amounts have been issued at one legal ratio, the ratio for example at which gold coins are reckoned as equal to times their weight of silver, a disturbance occurs in the market ratio of the metals, such as it is alleged must occur with variations in supply or demand. Let it be assumed that silver becomes cheaper, so that the silver in twenty standard shillings is no longer worth one sovereign in gold, but only three-quarters. That means practically that any person can for three-quarters of a sovereign buy enough silver bullion to make into twenty standard shillings. Clearly under these circumstances no one would pay his debts in gold when by first exchanging it for silver, he would gain five shillings in the pound. On the other hand there would be a rush to melt down gold in order to get the cheap silver, and the gold would, if silver remained below the old legal ratio, be driven from circulation. Under the opposite conditions of silver becoming relatively dearer, it would be replaced by gold, and thus the conclusion is reached that the joint standard would be an alternating standard with the cheaper metal as the real standard at any time. This law, according to which the cheaper metal displaces the dearer, is known as Gresham's Law; and it is found, historically, that a very small difference between the market and the legal ratio will suffice in any particular country to drive the dearer metal from circulation. This theory has been repeatedly illustrated in the history of particular countries. Thus, in England in 1717, according to the ratio adopted by the advice of Sir Isaac Newton, gold was, compared with silver, overvalued about percent, that is to say, it was so much more valuable as currency than as metal. Consequently the full-weight silver coins were withdrawn, and gold became the principal currency. In France, on the other hand, at the time of the great Revolution, silver was slightly overvalued, and thus became the principal currency, the gold being to a large extent driven from circulation.
The question then arises: What becomes of this dearer metal, and whence is the cheaper metal derived which must be coined to take its place? It is obvious that in any modern society, the gold or silver displaced will not be hoarded, nor is there any reason why the mere change in relative value should lead to a greater use of plate made of the dearer metal. Accordingly it seems inevitable that this dearer metal should be exported, in order to get the cheaper metal for coinage, for by parity of reasoning it cannot be drawn from hoards or plate within the country. It is this consideration which is the foundation of the argument, that although one country alone might be unable to maintain both metals as legal tender at a fixed ratio, under a union of the principal commercial countries the system would be quite possible and perfectly stable. For, ex hypothesi, there would in this case be no place to which the gold, supposing it became dearer, could be exported, or from which silver to take its place could be obtained. Again, if under these conditions any disturbance in the ratio occurred, (supposing it possible) to the advantage, for example, of gold, the gold would be driven from circulation and converted into bullion. Thus there would be a great increase in the supply of gold, and a corresponding increase in the demand for silver, and it is maintained that the old ratio would at once be restored. This process of reversion to stability is known as the compensatory action of the double standard, and is the counterpart of Gresham's Law in the present controversy.
If, then, the possibility of international bimetalism on a conventional basis is granted, it is requisite next to inquire into the advantages of the proposed system, for in currency above everything, the maxim quiesca non movere, to let things alone, is held to be sound. The advantages claimed are twofold. In the first place, it is argued that if the main work of standard money is in the future thrown upon gold, there must be a great fall in prices from the level to which the world had been accustomed with both metals as standard money. It is alleged that the fall in prices that has actually taken place since 1874, is mainly due to the substitution of gold for silver as the standard by Germany and other countries, because, taking the world as a whole, the amount of gold has not sufficed to keep up the level of prices. It is further argued that having regard to the increased use of gold for the arts and the diminished supply from the mines, this fall in prices will continue, or that there will be a continuous appreciation of gold, with a constant increase in the real burden of debts, and a disturbance of the real meaning of contracts and great friction in the adjustment of customary retail prices.
The term appreciation, as applied to gold, requires some explanation. If gold is the standard of value, it may be thought that its own value cannot change, just as a foot measure always remains of the same length—that a sovereign of full weight must always remain of the same value. But it is one thing to appoint by law that a certain amount of gold shall be coined into a certain number of sovereigns, and quite another to suppose that these sovereigns shall always exchange for the same amount of wealth. If, on the whole, a sovereign purchases more than it did, from whatever cause, that constitutes an appreciation of gold. An appreciation of gold is thus the same thing as a general fall in prices.
Seeing that the number of purchasable commodities is practically infinite, it is of course not easy to say even that a general fall is taking place, and it is still less easy to measure exactly the extent of the fall. For some commodities may be rising whilst others are falling. The general method adopted is to take certain important commodities as fairly representative. Thus the Economist, in its annual review, takes twenty-two commodities and compares their price with the price which was the average between 1845-50. Taking each of the average prices for that period as 100, the total would be 2200. In any subsequent year the actual change in price is worked out in these 'index numbers,' as they are called. Thus suppose during the given period the average price of wheat had been 60s. a quarter, and in some other year it became 30s., we should have to change the index number from 100 to 50, that is, under it or half. If in adding up the total of the index numbers in any year we find a rise has taken place, then it is assumed this fairly measures the general rise in prices. It may be interesting to quote some of the principal changes in the 'index numbers.' A fluctuating rise took place from 1850 up to 1864 when the index numbers became 3787. This is equivalent to saying that on the articles taken there was an average rise of about 72 per cent. It would, however, obviously be a mistake to argue that all prices must have risen to that extent, especially when we consider that owing to the American civil war the price of cotton was abnormally raised. From 1864 to 1871 there was a fluctuating fall in prices, the index numbers in the latter year being 2590. Then a rise took place, the numbers in 1872, 1873, 1874, being respectively 2835, 2947, 2891. Thus in these years of inflation, as they are often termed, though there was a rise of about 31 per cent. on the original 'index numbers,' there was a still greater fall from the numbers of 1864. From 1874 there was a steady and rapid decline, until on 1st January 1886 the aggregate 'index number' was only 2023, which was lower than the original number, and lower than that of any year subsequent to 1850. It is this very remarkable fall in prices that constitutes the appreciation of gold, and it is maintained by bimetalists that if silver were used to supplement gold as standard money, the fall in prices would be checked, and that for the future the general level would remain more steady. The fall in prices has apparently affected agriculturists more than any other class, because many of the charges are fixed for comparatively long periods, and thus expenses cannot be adjusted to the new level of prices very readily.
Secondly, the adoption of conventional international bimetalism (for that is the only system practically proposed) is advocated not only as a partial remedy for the appreciation of gold, but also as a preventive of fluctuations in the relative values of gold and silver. It is said that the recent depreciation of silver, caused by the monetary disturbance, has injuriously affected our trade with silver-using countries, and that in effect this depreciation has acted like a protective duty on imports into such countries, and a bounty on their exports. To these statements of alleged facts it is replied generally that our exports to the East, or silver countries, have largely increased, and that the exports from the silver countries, such as Indian wheat, have been really stimulated by other causes—e.g. railways and reduced freights by sea. It is, however, undeniable, that if gold prices on this side had remained at their old level, whilst at the same time silver had depreciated, the effects on our eastern trade would be accurately described by the analogies of a protection duty in the one case and a bounty in the other. So far, however, as the gold prices of commodities have fallen in the same degree as silver, no such stimulus or restraint appears to take place. A Manchester merchant may just as well sell to India for the same silver as before, even although it produces only thirty per cent. less gold, as sell to gold-using countries for thirty per cent. less gold, directly without the intervention of silver. Similarly, an Indian exporter has no advantage from cheap silver if he obtains for his exports thirty per cent. less gold wherewith to purchase silver.
Here, however, the question arises whether the depreciation of silver has not directly, to a large extent, caused the fall in gold prices. It is generally admitted that the effect of a bounty is to lower prices in the foreign country, and protective duties operate indirectly in the same way; and similarly, it is maintained (especially by M.
Cernuschi) that the depreciation of silver has lowered all prices measured in gold.
It will be observed that both of these advantages claimed for bimetalism depend upon questions of fact; and the difficulty in obtaining information was the chief reason for the appointment of the Royal Commission in 1886. No one, however, denies that if by any means the relative values of gold and silver could be fixed, it would be beneficial to the world at large. Mere fluctuations are certainly an evil. The possibility of thus fixing and maintaining a ratio receives strong practical support from the fact that for seventy years, in spite of great variations in the relative amounts of gold and silver produced, the existence of bimetalism in France, and the large use by other nations of silver as standard money, kept the ratio, apart from small variations due to exchange operations, at nearly . It may also be said that an international convention, once established, would not be broken in the same capricious manner as a purely political treaty; for it may easily be shown that every nation makes the agreement in the first place with its own subjects, and that by breaking the agreement it would injure them more than any one else. There is really not much more apparent reason why, once established, the system should be broken through, than if all the nations had adopted the same system of weights and measures. It is possible, of course, that the initial difficulties may be insuperable in spite of the extremely unsatisfactory condition of the present relations of gold and silver. At the same time it is difficult to suppose that the present state of things can continue.
The United States were compelled by the Bland Act to coin large quantities of silver every year; the Sherman Act (1890; repealed 1893) empowered the Treasury to increase its purchases of silver, but failed to maintain the ratio (see SILVER). The government of India also failed to maintain the ratio by stopping (1893) the free coinage of silver.
But any attempt to adopt gold as the sole principal standard throughout the world, would, in Mr Goschen's often-quoted opinion, produce a most disastrous monetary crisis, and thus the choice seems to lie between an international agreement on a reasonable basis, and the reliance on the self-interest of each particular nation to make no further change through dread of further evil.
It is impossible to even mention in a brief article all the points of controversy on the question of bimetalism. Until the recent great and rapid fall in the value of silver compared with gold, it was apparently believed that from some curious but beneficial natural cause the ratio would remain fairly steady, and for about seventy years the variations were very small. Accordingly, very little attention was paid to the question by economists, who for the most part were content with saying that it would be difficult for one country to maintain effectively a double standard. Again, when the depreciation set in, it was believed that it would be only temporary, but this belief has proved to be unsound.
The partial failure of the Latin Monetary Union to preserve an international coinage, ought not to prejudice the case of a bimetallic union like that proposed by the United States. The Latin Union, proposed in 1865 and accomplished in 1868, was essentially a treaty between certain countries (France, Belgium, Italy, Switzerland) for an identical coinage (apart from the mere stamp) to be received as legal tender in each country. It was only accidentally bimetallic, and no special provision was made for the unlimited coinage of either gold or silver.
It is impossible to obtain accurate figures either as to the production of gold and silver, or as to the extra demands made on gold and the extra supplies of silver thrown on the market since the demonetisation of the latter. There is, however, no doubt that the production of gold has decreased as that of silver increased, and that the demonetisation of silver has to some extent increased the supply of it as a commodity.
To understand the subject in its present bearings, the reader must refer to recent writers, and consult especially the Report of the Royal Commission. On the monometallic side may be mentioned Mr Fowler's Appreciation of Gold, Mr Giffen's Essays on Finance, and the papers published in the Contemporary Review by Mr Wells. On the other side much more has been written, since attack is always more productive than defence—e.g. various essays by H. Cernuschi, H. H. Gibbs, Grenfell, R. Barclay, S. Smith, &c.; a valuable historical work by the Hon. Dana Horton called the Silver Pound, and a Treatise on Money, with Essays on Present Monetary Problems, by Professor J. S. Nicholson, may also be mentioned. The best book for the statistics of the question is Soetboer's Materialien, translated from the German for the use of the Royal Commission, and published in America by Mr Atkinson.