Bimetallism

October 2023.

I like reading arguments from the past that seemed convincing at the time but turned out to be very wrong. To that end, I picked up Barbour’s The Theory of Bimetallism, originally published in 1885. For context, Barbour is railing against the “Crime of 1873”, when the US stopped letting you walk into a federal mint with 0.77 troy ounces of silver and walk out with a 0.77 troy ounce silver dollar. You can imagine why. When the price of silver was more than $1 per 0.77 ozt, everybody melted their silver dollars and sold the bullion. When the price of silver was less than $1 per 0.77 ozt, everybody took silver to the mint and turned it into coinage at a favorable rate.

To further complicate matters, you could do the same thing with gold. This meant that the US, or any government allowing free coinage, had to take a stand on the relative value of gold versus silver. The US did that with the Coinage Act of 1792, which legally set the ratio at 15:1.

What if the actual, free-market value of gold:silver was higher than 15:1? Then you’d melt some silver, turn it into silver coins, exchange them for gold coins, melt those down, and sell them as bullion. And vice versa for a ratio below 15:1. It’s insane that this system worked at all, but it does give you an idea why people mostly thought of money as gold or silver (being skeptical of face values) through most of the 1800s.

Rather than getting to Barbour’s arguments for bimetallism, I’ll stop at an earlier point: the argument for any metallic standard. I’ll quote him:

We find that inconvertible paper currencies have frequently come into existence. The Government of a country has found itself in a position to compel the people of that country to accept paper tokens, and has forced them into circulation. No such currency is, however, of any value for the final settlement of balances between two nations. Inconvertible paper may be taken in a foreign country, but only on the understanding that it can be exchanged in the country of origin for something which possesses intrinsic value. For the reason just stated an inconvertible paper currency; but the chief and fatal objection to it is the impossibility of feeling certain that the issue of inconvertible paper money will be so limited as to prevent depreciation.

In other words, Country A would never accept paper money from Country B, because who knows whether those Country B miscreants will just hyper-inflate their own money, making the paper worthless.

But of course, that’s exactly what happened. Bretton Woods put the world on the US dollar, and then Nixon ended the gold standard in 1971. So the interesting question is: what specific changes took place over ≈90 years so that Barbour’s argument, taken almost as a self-evident axiom in 1885, was falsified in the years following 1971?