Bimetallism, Silver and The Crime of 1873
The dollar’s future is uncertain, the status quo of world currency is being thrown off balance by the inherent flaws of fiat money…
So, in this context, would it perhaps make sense to reconsider the benefits of long-gone bimetallism right now, when dissatisfaction with the current international monetary system is becoming hard to ignore, writes Thomas Hughes.
For starters, what is bimetallism? The bimetallic standard is a monetary system where gold and silver coins circulate together, with a fixed exchange rate (e.g. 16:1, silver to gold). Like any monetary system, bimetallism includes certain institutional agreements that are in effect by law, and the practice of monetary circulation.
Those institutional agreements are based on two main components: the law of coinage and the law of monetary circulation. Financial authorities may allow free minting of one or both metals. “Free” minting does not mean literally free, however, as a government (or private mint) will charge a certain fee for converting a kilogram of precious metal into a kilogram of coins.
While the free minting of gold and silver coins is a necessary part, it isn’t an exclusive condition for the bimetallic standard. The Law on Currency Circulation also outlines such requirements as the denomination of coins, units of measurement, conditions of circulation, etc. With free money circulation and liberal exports and imports of both metals, the coin becomes an unrestricted legal tender. As such, bimetallism is based on the free minting of coins, the unlimited circulation of coins and precious metals, and a fixed exchange rate between them.
If each one of these three conditions is met, bimetallism thus becomes a double standard system - a system of dual currency. In its purest form, such a monetary structure was in effect primarily in the USA, and the Latin Monetary Union which was led by France in the 19th century.
BIMETALLISM IN HISTORY
The bimetallic standard actually existed in its natural habitat for many centuries, thus its sudden ”demise” in the 1870s may raise a few questions. In 1873, Congress carried out a revision and codification of the Coinage Act. It should be emphasised that these measures were taken during the period of the paper standard, when there were almost no silver coins in circulation, and the paper dollar was worth less than the gold or silver dollar. Moreover, from 1806 to 1872, not even $10 million worth of silver dollars was produced, and almost all of this money left America for the East as part of trade transactions with the Old World.
All this led to the fact that in 1873, the American public was no longer familiar with the American silver dollar and had no particular interest in its circulation within the country. Accordingly, when Congress codified the coinage laws and removed the standard silver dollar from the list of currencies, the move received little public attention. It was perceived as nothing more than a legal recognition of something everyone had already accepted.
However, what transpired from this law was the fact that the unrestricted minting of silver coins would cease, and while its respective paper standard existed in the country for another seven years allowing the standard silver dollar, like all gold coins, to continue being used unrestrictedly as a legally recognised means of payment, it was stripped from its status as standard money. Thus, bimetallism, which had legally existed in the country since the adoption of the Coinage Act of 1792, was effectively abolished, and when the country returned to the metal standard on January 1st, 1879, it had transitioned to the monometallic gold standard. From this point forward, only unlimited minting of gold coins was authorised.
Many proponents of bimetallism subsequently argued that by removing the standard silver dollar from the list of American coins in 1873, lawmakers abolished bimetallism covertly and even fraudulently, which earned it the nickname ”the crime of 1873”. At first, the new coinage did not cause any disagreements in society, but soon enough, a rise in the price of gold in relation to silver became quite apparent. As such, if the ratio of the price of gold to silver in 1870 was about 1:15, by 1896 it had reached 1:40.
PARALLELS WITH CURRENT TRENDS
The rise in the price of gold led to deflation - that is, an increase in the purchasing power of money - about 1.7% per year. Deflation, in turn, causes a number of macroeconomic issues. Namely, the unemployment rate reached 18% in 1896 and consequently, credit became hard to come by, which mostly affected farmers and the petty bourgeoisie.
Observing the current events, such as the digitisation of money and the erosion of the currency’s value through monetary hyperinflation and zero interest rate policies, it’s impossible not to draw parallels between the abolition of bimetallism in 1873 and today…In both cases, the middle class stood the most to lose and, first and foremost, the resulting instability has hurt private property by abrading its value.
The monometallic gold standard in itself is problematic, as it is essentially monistic. Without counterbalance, the gold standard alone is simply an unsecured standard in disguise. Bimetallism here is the only solution where the price of gold is determined in relation to silver, and the price of silver - in relation to gold. This provides us with a self-correcting mechanism capable of maintaining the fair value of currencies.
The gold standard is linked to fiat money, which is valued in relation to gold, and the price of gold itself is determined in relation to unsecured currencies, and there is no independent assessment (such as silver) to maintain the fairness of this system. Meanwhile, the bimetallic system’s ability to self-correct has been proven by the millennia that it has been used by the people. After all, since when did we embark upon the path of the most significant monetary and financial instability in the history of mankind? With the introduction of the monometallic gold standard in the 19th century.
Bimetallism actually maintains fair ratios in the system and eliminates the possibility of unsecured currencies, which constitute, in great part, the root of today’s most trying economic issues. The gold and silver system governed itself for nearly thirty centuries, and no single government could interfere with the natural flow of currency. Today’s bimetallic market operations could prove to be even more efficient, considering the advances in communications technology. The truth is that the question of money is too delicate and important for the health of mankind as a whole, to entrust it in the greedy hands of the governmental elite.
The bimetallic standard allowed anyone to settle a transaction, providing payment in silver, gold, whatever, without doubting the legal standing of their possessions. And nobody was forced to accept inflated banknotes that are backed by no value of their own. And there was no central bank...
Alas, in 1873, bimetallism was declared cancelled in America, and thus its legacy worldwide seemed to come to an end. On one hand, many adherents of bimetallism never stopped fighting for its return, like the American presidential candidate William Jennings Bryan, who, in 1896, delivered his ”Cross of Gold speech”, which criticised the gold standard and Eastern monetary interests, and fought for inflationary policies based on the expansion of minting of silver coins. On the other, it was a little too late to undo the damage of the U.S. Coinage Act of 1873, and neither Bryan nor The Silver Republican Party’s free silver movement could overturn the established gold standard.
A BRIGHT FUTURE FOR SILVER
Today, the official reserve assets that make up international liquidity include the US dollar, pound sterling, IMF SDRs and gold. There is no silver among the foreign reserves of central banks. However, during the times of bimetallism, silver was a worthy competitor to gold, and it could once more take this place, because silver remains part of state reserves in most countries. Assigning silver to the official reserve assets would allow the financial authorities to increase the volume of foreign reserves and thereby reduce the likelihood of the emergence and spread of currency crises. During the period of bimetallism, the combination of the two metals provided large reserves and increased currency stability, which is something the world now desperately needs.
In this regard, the prospect of a dollar crisis is forcing market players to look for alternative reserve assets. Silver, along with gold, can act as a last resort asset and help support the normalisation of global economic development, even in the event of a reserve currency crisis. The use of silver as an official reserve asset, would stimulate the development of a silver-based financial market: silver-backed securities, silver certificates, silver derivatives, etc. Meanwhile, new opportunities for investment diversification would strengthen national banking systems and financial institutions. EG