Bimetallism is a monetary standard and a monetary system that involves the simultaneous use of gold and silver. There are two types of monetary systems. The first is the metal standard. It also comes in two types. This is bimetallism and monometallism. The second is a paper credit standard. The modern monetary system refers precisely to the latter. But today we will talk about bimetallism as historically the first monetary standard, its shortcomings, historical development and features in different countries.
Characteristic
What is the monetary system? Bimetallism, monometallism, and finally paper-credit standard - these are three historical stages of its evolution. In the 19th century, states fixed the value of their coins in gold and silver. Thus, the exchange rate of their currencies during this period was fixed. Bimetallism involves the simultaneous use of gold and silver in coinage. With a double standard, there are no restrictions on the creation of coins, if there are raw materials for their production. All the money in circulation with him is backed by precious metals. The main problem of using this system was that each state independently determined the exchange rate of gold in relation to silver. Therefore, it could significantly differ in one country from another.
In 1865, an attempt was made to create a single international bimetallic system. For these purposes, France, Belgium, Italy and Switzerland merged into the Latin Monetary Union. He established parity between the two metals. However, the system lasted only a few years, which was associated with the monetary frauds of Italy and Greece and the French-German war of 1870-1871.
In 1867, an international conference was held in Paris, at which most delegations voted in favor of the gold standard, that is, monometallism. Soon everyone else joined the system, because in practice they understood what bimetallism is and what its main disadvantages are. The most stable form was a system with a parallel currency, but it was not widespread. As for complete bimetallism, sooner or later it becomes obsolete. This is due to the fact that the fixed official rate does not reflect the situation in the market.
Features
Thus, the following main characteristics of this standard are distinguished:
- Functions of money are performed by two metals. Most often it is gold and silver.
- Coins are made of both metals.
- Free parity between gold and silver.
- The circulation of coins from both metals occurs simultaneously and in parallel.
- The price of goods is set both in gold and in silver.
These types of bimetallism are distinguished:
- Full . Its second name is "dual currency system." Complete bimetallism has been widespread in the past. It is his features that underlie the general definition of the entire system. All other species exclude one of its features.
- Parallel .
- Partial . It is also called the lame currency system.
Common to all types of bimetallism is the fact that both gold coins and silver money are in circulation.
Full bimetallism
So, bimetallism is a monetary system, which is characterized by the following features:
- Legal tender are both gold and silver coins. The price of one product is set in both metals.
- The coinage of both gold and silver is free and complete.
- A state (union of countries) establishes parity between metals.
In this form, bimetallism existed in the United States. In 1792, the ratio of gold to silver was fixed there - 1 to 15. The parity changed several times until the end of the 19th century, when the standard in the USA was changed. Complete bimetallism was also characteristic of France. Initially, the country set the parity of gold to silver - 1 to 15.5. However, it was changed several times later, but still did not keep pace with market fluctuations. In 1874, the coinage of silver was stopped in the country. The dual currency system has outlived itself. This is due to the fact that one metal always displaces the other at a fixed parity. If the price of gold rises, then people are better off paying with silver. This leads to the fact that the influx of the latter begins on the market, causing it to depreciate even more. This is exactly what happens when silver prices rise. Only in this case an influx of depreciating gold occurs on the market.
Another drawback of such a system is associated with the operation of the Gresham law. Over time, more and more unbalanced money becomes in circulation. This is due to the fact that during financial difficulties the state is easiest to reduce the content of precious metals in coins while maintaining their previous nominal value. The consequence of such fraud is an increase in prices and an increase in the rate of savings.
Parallel bimetallism
This is a system in which:
- The minting of coins of both metals is free and occurs without restriction.
- The state does not establish the exchange rate of gold in relation to silver.
- Coins of both metals are in circulation.
The parallel currency system was less common than full bimetallism. It existed in many Western European countries in the 15-17th centuries. Hannover later abandoned it all. Here she existed until 1857.
The parallel currency system eliminates some of the shortcomings of bimetallism in full form. The lack of tight parity between gold and silver allows both coins to be freely traded and exchanged at the market rate. However, the main disadvantage with this standard is the need to consolidate all prices in both metals. Sometimes states distinguished between the use of gold and silver. For example, the former was used in international settlements, and the latter in the domestic market.
Lame Currency System
This monetary standard is characterized by the following features:
- The state legislates the relationship between the two metals.
- Coins of gold and silver are simultaneously in circulation.
- However, free coinage is permissible only for one of the metals.
Based on these principles, the standard that underlies the Latin Union between France, Belgium, Italy, Switzerland and Greece was built. Ultimately, however, a problem arose with silver five-franc coins. Gradually, the whole world came to monometallism. However, today gold no longer performs monetary functions. The modern monetary system is paper credit.
Economic analysis
In the early 1990s, the famous economist Milton Friedman studied this system. He concluded that bimetallism is the cause of US price volatility in 1873. According to Friedman, this system has brought long-term harm to the US economy. He believed that bimetallism is a huge mistake, which led to extremely adverse consequences for the United States.
In argentina
In 1881, currency reform began in the country. In July 1883, the bimetallic standard came into force. Gold and silver pesos appeared in circulation. Paper money was equated with them. Five banks minted coins in Argentina. This standard lasted only 17 months in the country. Already in December 1884, banks began to refuse to exchange banknotes for gold at the established rate.
In France
In 1803, a law was passed in the country according to which the franc could be exchanged for 5 grams of silver. Separately, the gold rate was established. A kilogram of this metal was worth 3,100 francs.
In Great Britain
Bimetallism was widely used in medieval England. However, the minting of silver coins was prohibited at the beginning of the 18th century, when the gold standard was introduced in the country. However, for many years, supporters of bimetallism advocated its return, especially in times of crisis.
In the united states of america
The US Constitution enshrined gold and silver as official means of payment with a floating rate. However, in 1792, Treasury Secretary Alexander Hamilton proposed fixing the ratio of silver to gold as 15 to 1. Corresponding changes were made to the law. In 1834, silver depreciated somewhat, and the rate of 16 to 1 was fixed. After the adoption of the Law on Coinage in 1873, the USA practically stopped using this standard, but formally it was canceled only at the beginning of the 20th century. According to the famous economist Milton Friedman, bimetallism caused significant damage to the United States.