Bimetallism was based upon the assumption that it was de sirable to continue the circulation of both metals as primary money; it was argued that a higher stability of values would result, since price levels could rise or fall only as the combined volume of the two metals rose or fell, and that the probability was small that the two metals "would change in value in the same direction and in the same degree at the same time." This combining of volumes would result in a sort of compensating value—if silver were the cheaper metal on the market it would flow to the mint and into coins; gold, on the other hand, would flow to the market and be melted down. The result would be that the market value of silver would rise and that of gold fall until the market ratio was again brought into conformity with the mint ratio.
The gold standard assumes that gold alone is a better and more stable measure of value than gold and silver taken together. Under bimetallism the fluctuations caused by shifts, from gold to silver and from silver to gold, which occur as the market ratio adjusts itself to the mint ratio, are disturbing to the financial and commercial world. No mint ratio which will bring permanent bimetallism can be determined upon, since the accidents of pro duction and consumption of the two metals may bring about the complete expulsion of one of the metals, in which case monometal lism of the other will prevail. Whenever the metal in a coin is valued more highly in the market than at the mint, it is either melted or exported; the overvalued metal drifts to the mint, the undervalued to the market. If the supply of the overvalued is sufficiently large, the principle of compensating values which tends to restore the ratio proves unavailing and the complete expulsion of the undervalued metal is inevitable. To keep a bimetallic system in existence therefore requires: (I) that the mint ratio be changed from time to time if the mint and market operations fail to make the two ratios conform, and (2) that the mint ratios adopted among the leading commercial nations agree. The former requirement makes possible dangerous disturbances at the caprice of legislators; the latter has proved and is likely to prove a political impossibility, on account of the jealous and independent attitude of each nation in its monetary affairs.
Operation of Bimetallism Illustrated To illustrate the compensatory theory, suppose we had had bimetallism in the United States during the past generation. The pure content of the gold dollar is 23.22 grains Troy, and of the silver dollar 371.25 grains, these weights being determined by the coinage law and representing a mint ratio (371.25 23.22 =
16 -) of approximately 16:1. A Troy ounce of gold or silver weighs 48o grains Troy. Under bimetallism, therefore, at the mint an ounce of silver would be worth $1.29 in gold (48o ÷ 371.25 = 1.29), and an ounce of gold $20.67 in gold (480 ÷ 23.22 = 20.67); these would be the "mint prices" and would be constant, except as Congress might legislate different weights for the coins. With free and gratuitous coinage of gold, its market and mint prices would conform, for if the market price of gold bullion should fall to, say, $20 per ounce, the holder of bullion would carry it to the mint and get $20.67; in other words, the mint would provide an unlimited demand for gold at $20.67 per ounce. If the price of bullion should rise to, say, $21 per ounce on the market, holders of coins would reduce them to bullion for sale. In other words the coined gold would constitute a potential sup ply, as against the industrial uses of gold, and keep the market price down to $20.67. The mint therefore would stabilize the price of gold.
The price of gold is quoted in terms of gold, so likewise is the price of silver. The price of silver will fluctuate with the acci dents of its supply and demand. Suppose it fell to, say, $1.20 per ounce; under the conditions of bimetallism given above, the holder of bullion would prefer to sell it to the mint at $1.29 rather than on the market at $1.20. In fact he would use all the pur chasing power he could assemble—gold coins and certificates, silver coins and certificates, bank notes, bank deposits—to buy silver bullion on the market at $1.20 and then resell it at the mint at $1.29; and he would use the proceeds of each sale to buy more bullion. This demand for silver would tend to raise its market price from $1.20 to $1.29, at which price the operation would cease to be profitable. Meanwhile the market ratio of the values of equal amounts of gold and silver bullion (20.67 ÷ 1.20 = 17.2 2) would shift from 17.22:r to 16:1.
Suppose, on the other hand, the market price of silver had risen to $1.45 because of a conjunction of underproduction and larger consumption. Then it would be profitable to reduce silver dollars to bullion and to sell it at $1.35 per ounce. The silver in a silver dollar would then be worth in the market more (371.25 ÷ 48o X $1.35 = $1.o44) than its face value. The result of this process would be that the supply of silver bullion would increase and its price tend to fall from $1.35 to $1.29, and the market ratio of the values of equal amounts of gold and silver (20.67 ÷ 1.35 = 15.3) would shift from 15.3:1 to 16:1.