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In this article we will discuss about:- 1. Meaning of Bimetallism 2. Merits of Bimetallism 3. Demerits.
Meaning of Bimetallism:
Bimetallism, also known as bimetallic standard, is a monetary system under which the monetary unit of the country is expressed by law in terms of two metals, usually gold and silver, in a specific ratio. In other words, under bimetallism both silver and gold coins circulate simultaneously within the country.
They are unlimited legal tender. They are minted freely and in unlimited quantities free or with some charge. Both metals are imported and exported freely. Both types of coins are exchanged for each other at a fixed mint par ratio.
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Bimetallism was in vogue in England throughout the 18th century. The United States adopted it in 1792, when the mint ratio between silver and gold was fixed at 15:1. France adopted it in 1803 followed by Belgium, Switzerland and Italy in 1865. With the growing popularity of the gold standard, it was abandoned by these European countries in 1874.
Merits of Bimetallism:
Bimetallism as monetary system had the following advantages:
1. Adequate Supply of Currency:
One of the merits of bimetallism was that it ensured an adequate supply of currency within the country. As both gold and silver coins were in circulation and freely minted, there was no likelihood of both becoming short in supply simultaneously.
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2. Price Stability:
It was also argued that flexibility of money supply assured price stability. The internal price level was linked with the prices of gold and silver. And the prices of gold and silver depended upon their supply and demand. If the output of silver rose, that of gold fell and vice versa.
It meant that fall in the price of silver was compensated by rise in the price of gold and vice versa. So there was greater stability in the prices of gold and silver taken together than in the case of one metal. It was like two drunken men walking hand in hand steadily than apart.
3. Stable Price of Silver:
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The proponents of bimetallism argued in the last quarter of the 19th century and twenties of the 20th century that bimetallism would stop the fall in the price of silver. In those days, the price of silver was falling and the silver producing countries were at a disadvantage in trading with gold standard countries.
It was, therefore, felt that the adoption of bimetallism would increase the demand for silver and raise its price. This would increase the purchasing power of silver-producing countries and also help in overcoming depression in them.
4. Stable Exchange Rates:
It was further argued that bimetallism helped to maintain stable exchange rates between countries. This was because the ratio of exchange between gold and silver was fixed, being determined by the gold value of silver. Therefore, there was no possibility of the market rate of exchange to deviate from the mint par rate of exchange.
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5. Encouragement to Foreign Trade:
As a corollary to the above, bimetallism encouraged foreign trade in two ways. First, due to exchange stability between countries, and second, a country on bimetallism could have trade relations with any country on bimetallism and on silver or gold standard.
6. Easy to Keep Cash Reserves:
As both gold and silver coins were unlimited legal tender under bimetallism, it was convenient and easy for commercial banks to keep minimum cash reserves against their liabilities either in gold or silver coins. Similarly, it was also argued that it was more easy for the government to meet its cash requirements with two types of coins than with either silver or gold coins.
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7. Encouragement to Production:
The advocates of bimetallism contended that bimetallism as a monetary system was superior to the silver or gold standard because it encouraged production. As money consisted of gold and silver coins under bimetallism, the total money supply was greater than its demand. As a result, the rate of interest declined which encouraged investment and production.
Demerits of Bimetallism:
The opponents of bimetallism give the following arguments against this monetary system:
1. Inequality of Market Ratio and Mint Ratio:
The success of the bimetallic standard depended upon the maintenance of equality between the market ratio and mint ratio of gold and silver. But it was not possible to maintain this equality because of a strong tendency towards the continuous increase in the supply of one metal.
This would bring a fall in its value thereby creating divergence between the two ratios. The metal whose value increased was hoarded by the people. Speculation would start thereby creating confusion within the economy.
2. Operation of Gresham’s Law:
As a corollary to the above, when there was divergence between the mint ratio and the market ratio the Gresham’s law would operate and bimetallism would breakdown. According to this law, cheap money drives out dear money, or bad money drives out good money.
If silver became cheaper, people used this as medium of exchange and hoarded or melted gold coins with the result that gold coins disappeared from the market. This would happen when the market rate of gold exceeded its mint rate. When Gresham’s law operated the country would be on monometallism.
3. Not Successful Internationally:
It was argued that if bimetallism was adopted by many countries, it would be successful. But this presupposed the adoption of the same mint ratio between the gold and silver by all countries. But it was not possible to expect international cooperation on maintaining a uniform ratio in every country.
Even if the countries agreed on this question, no government could prevent its citizens to hoard or melt the costly metal when its price increased within the country.
4. No Price Stability:
The opponents of bimetallism dispute that flexibility of money led to price stability. According to them, there was no set rule that when the supply of one metal rose that of the other metal would fall. There was every likelihood for the supplies of both metals to fall, as has happened in the case of gold and silver.
Thus on all counts, Bimetallism was never favoured by the nations of the world. For it was a complex and costly standard which could not work smoothly. They found that a constant supply of money could be ensured in a much better way by the managed paper standard. So the study of bimetallism is of historical and academic interest only.
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