The Bimetallic Standard – Advantages Of This Standard
A bimetallic standard is one which the monetary unit defined in terms of two metals (for example Gold and silver) at a legally fixed ratio for one another. The requirements for such a standard are the same as those of gold standard. With the addition that all the provisions regarding redeemablity purchases and sale, import and export apply to silver as well as to gold. These requirements are thus;
- The unit of money must be defined as a given weight of silver and also of gold. For instance the United States coinage out of 1792 defined the dollar as being either 371.25 grains of pure silver or 24.75 grains of pure gold.
- There must be inter convertibility of all the kinds of money )in essence paper or bank money) in the system to silver or gold at a fixed rate.
- There must be free coinage and free and melting of both silver and gold
- There must be free import and export of both metals
The major advantage of this standard to the proponents is that the value of a bimetallic standard money is more stable than that of either a gold or silver standard alone. Since the value of a bimetallic standard would be based on the value of two metals, fluctuation, would tend average out hence if gold were to rise in value, the bimetallic bullion standard would vary less than a Gold standard. The same is true for the value of silver Vis-a-vis a silver standard.
The principal difficult however relates to the difficulty of fixing correct and permanent ratio for all time between the value of the two metals, each off which is subject to different demand and supply conditions instead of functioning as a double standard, the bimetallic standard ends the breakdown to alternating gold and silver standards. The legally fixed ratio between the two metals is known as the mint ratio.
If the two metals exchange in the open market at the same ratio, there is no problem. But if new sources of silver were found resulting in large increase in the supply of silver and a fall in the market value, no one would bring gold to the treasury to be changed for paper money or be exchanged with gold at the mint ratio. If the country’s gold stock were small, this process would continues until the treasury’s gold was gone and the country would in effect be on a silver standard.
Exactly the opposite effect would take if gold were to fall in value. People would have heard their relatively valuable silver and bring their gold (over valued by the treasury) – to the government to exchange for silver. This might continue until only gold was left in circulation.
Gresgam’s Law Of Bad Money Drives Out Good Money (Bimetallic Standard)
When two countries are involved, the same result would be achieved through import and export of the metals by arbitrageurs. The tendency for the overvalued money to drive the undervalued money out of circulation is known as Gresgam’s law, in essence that “bad money drives out good money”.
From the above illustration, we can deduce that a country cannot keep both metals in circulation if the fixed ratios differs from those fixed on them by means of other countries. Thus bimetallism could only function only if fixed ratios were universal adopted and re-adjusted to reflect changes in supply and demand conditions. Hence if bimetallism was adopted by the whole world, it would have had a greater chances of success, but even then, the fixed ratio anytime to mine one metal rather than the other. Such altering situation would be quite unstable than if based on gold alone. It was to obviate this obstacle that the symmetallic standard was proposed by Alfred Marshal.