In economics, bimetallism is a monetary standard in which the value of the monetary unit is defined as equivalent both[1] to a certain quantity of gold and to a certain quantity of silver; such a system establishes a fixed rate of exchange between the two metals.
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In 1881, a currency reform in Argentina introduced a bimetallic standard, which went into effect in July 1883.[2] Units of gold and silver pesos would exchange with paper peso notes at given par values, and fixed exchange rates against key international currencies would thus be established.[2] Unlike many metallic standards the system was very decentralized: no national monetary authority existed and all control over convertibility rested with the five banks of issue.[2] The period of convertibility lasted only 17 months: from December 1884 the banks of issue refused to exchange gold at par for notes.[2] The suspension of convertibility was soon accommodated by the Argentine government, since, having no institutional power over the monetary system, there was little they could do to prevent it.[2]
In 1787 the United States Constitution established gold and silver as the legal tender of the United States[3] at a floating exchange rate. Then in 1792, Secretary of the Treasury Alexander Hamilton proposed fixing the silver to gold exchange rate at 15:1, as well as establishing the mint for the public services of free coinage and currency regulation "in order not to abridge the quantity of circulating medium."[4]. With its acceptance, Sec.11 of the Coinage Act of 1792 established: "That the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one, proportional value of gold to silver. according to quantity in weight, of pure gold or pure silver;" the proportion had slipped by 1834 to sixteen to one. Bimetallism was effectively abandoned by the Coinage Act of 1873, but not formally outlawed as legal currency until the early 1900s. The merits of the system were the subject of debate in the late 19th century. If the market forces of supply and demand for either metal caused its bullion value to exceed its nominal currency value, it tends to disappear from circulation by hoarding or melting down.
In the United States, bimetallism became a center of political conflict toward the end of the nineteenth century. During the civil war, to finance the war the U.S. switched from bimetallism to a fiat money currency. After the war, in 1873, the government passed the Fourth Coinage Act and soon resumption of specie payments began without the free and unlimited coinage of silver. This put the U.S. on a mono-metallic gold standard. This angered the proponents of monetary silver, known as the silverites. They referred to this act as "The Crime of '73," as it was judged to have inhibited inflation. The Panic of 1893 was a severe nationwide depression that brought the money issue to the fore. The "silverites" argued that using silver would inflate the money supply and mean more cash for everyone, which they equated with prosperity. The gold advocates said silver would permanently depress the economy, but that sound money produced by a gold standard would restore prosperity.
Bimetallism and "Free Silver" were demanded by William Jennings Bryan who took over leadership of the Democratic Party in 1896, as well as the Populist and Silver Republican Parties. The Republican Party nominated William McKinley on a platform supporting the gold standard which was favored by financial interests on the East Coast. A faction of Republicans from silver mining regions in the West known as the Silver Republicans endorsed Bryan.
Bryan, the eloquent champion of the cause, gave the famous "Cross of Gold" speech at the National Democratic Convention on July 9, 1896 asserting that "The gold standard has slain tens of thousands." He referred to "a struggle between 'the idle holders of idle capital’ and 'the struggling masses, who produce the wealth and pay the taxes of the country;’ and, my friends, the question we are to decide is: Upon which side will the Democratic party fight?" At the peroration, he said "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." However, his presidential campaign was ultimately unsuccessful; this can be partially attributed to the discovery of the cyanide process by which gold could be extracted from low grade ore. This process and the discoveries of large gold deposits in South Africa (Witwatersrand Gold Rush of 1887 - with large-scale production starting in 1898) and the Klondike Gold Rush (1896) increased the world gold supply and the subsequent increase in money supply that free coinage of silver was supposed to bring. The McKinley campaign was effective at persuading voters that poor economic progress and unemployment would be exacerbated by adoption of the Bryan platform. 1896 saw the election of McKinley. The direct link to gold was abandoned in 1934 in FDR’s New Deal program and later the link was broken by Nixon when he closed the gold window.
In 1992, economist Milton Friedman concluded that abandonment of the bimetallic standard in 1873 led to greater price instability than would have occurred otherwise, and thus resulted in long-term harm to the US economy. His retrospective analysis led him to write that the act of 1873 "... was a mistake that had highly adverse consequences."[5]