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preeminence of Britain as testimony to the virtues of a gold standard and the move by many European countries in the 1870s from bimetallism to gold as testimony to the fragility of bimetallism; persons for whom silver was not the major issue but who objected to other planks in the populist platform. No doubt his opponents also included many who were as disturbed as his followers were by the economic difficulties that the country had experienced in the prior decade but who—correctly, I believe—regarded the proposed cure of 16 to 1 as likely to make the disease even worse.

In the event, the ultimate result was decided by none of the issues raised or arguments offered by either side in the heated political contest. It was decided by faraway events in Scotland and South Africa that never entered into the domestic debate. A fascinating example of the far-reaching and mostly unanticipated effects of a seemingly minor monetary development.

CHAPTER 6

Bimetallism Revisited*

Throughout recorded history, monetary systems have generally been based on a physical commodity. Metals have been the most widely used, the precious metals of silver and gold above all. As between them, "silver composed nearly the entire circulating metallic currency of Europe" until at least the late nineteenth century (Martin 1977, p. 642), and also of India and other parts of Asia. Gold was used much less, primarily for high-valued transactions.

The rate of exchange between silver and gold was sometimes specified by the authorities, sometimes left to the market. If a legal rate was specified, the result was a bimetallic system (as described in chapter 3) under which an authorized mint stood ready, for anyone who requested it to do so, to turn either silver or gold into coins of designated face value and specified weight and fineness on demand (free coinage). Typically there was a small seignorage charge to cover the cost of minting, though sometimes, as in Great Britain and the United States, there was none. The legal price ratio was determined by the weights assigned to the silver and gold coins. For example, from 1837 to the Civil War, the U.S. gold dollar was defined as equal to 23.22 grains of pure gold, the silver dollar as equal to 371.25 grains of pure silver—or 15.988 times as many grains of silver as of gold, rounded in common parlance to a ratio of 16 to 1.

A strictly equivalent way to define a bimetallic standard is in terms of a government commitment to buy either gold or silver at a fixed price in money designated as legal tender. For the U.S. example, the corresponding fixed prices were $20.67 per fine ounce of gold and $1.29 per fine ounce of silver.* That remained the legal price of gold until 1933, when President Franklin D. Roosevelt raised it by stages and then fixed it at $35 an ounce in early 1934. There it remained until it was raised to $42.22 in early 1973, the price at which the gold holdings of the U.S. government are still valued on the books, though the market price is currently (1991) about nine times the official price.

While either silver or gold could legally be used as money, in practice (as was explained in chapter 3) only one of the metals might be so used. In addition to their use as money, both silver and gold have important nonmonetary, or market, uses, for jewelry and for industrial purposes. When the market price ratio differed substantially from the legal ratio, only the metal that was cheaper at the market price than at the legal ratio would be brought to the mint for coinage. For example, if 1 ounce of gold sold on the market for the same number of dollars as 15.5 ounces of silver when the legal ratio was 16 to 1, a holder of silver, rather than taking the silver directly to the mint, would do better to exchange his silver for gold at the market ratio and then take the gold to the mint.

The situation in the United States from 1837 to the Civil War was roughly as just described: the legal ratio was 16 to 1, the market ratio 15.5 to 1. The result was that the United States was effectively on a gold standard.