bimetallism

Bimetallism is a monetary system in which the circulating medium includes two metals, usually gold and silver, that are simultaneously legal tender and redeemable at a fixed ratio set by law. Under bimetallism, the government guarantees that either metal can be used to pay debts or to settle financial obligations, according to the stated weights and fineness.

The fixed legal ratio creates a nominal equilibrium between the two metals, and markets encourage arbitrage to keep market prices near the ratio. In practice, coins or bullion of both metals circulate, and the authorities mint coins in standard units of value. If the market price of one metal deviates from the legal ratio, people can profit by exchanging the under- or over-valued metal, which tends to drive the ratio back toward parity.

Bimetallism was widely adopted in parts of Europe and the Americas during the 18th and 19th centuries as a way to widen the money supply and stabilize prices. The United States, for example, legislated a bimetallic framework in the Coinage Act of 1792, and debates over silver continued into the late 19th century with movements for "Free Silver."

The system faced persistent difficulties: shifts in the relative supply and demand for gold and silver, differences in minting costs, and international differences in price levels. When market conditions diverged from the fixed ratio, one metal could drive the other out of circulation. Many nations eventually moved to monometallic standards or fiat money, replacing bimetallism with other monetary arrangements.