The U.S. was officially on a bimetallic (silver and gold) standard between 1792 and 1873, with the official ratio between the two metals set at about 16:1. Carefully explain what would happen if the free market relative price rose to 17:1. Carefully explain what would happen if the free market relative price fell to 15:1. Relate your answer to Gresham’s Law, and use this logic to explain the attraction of “free silver” in the 1880s and 1890s: which economic interests would have been served and which harmed? While you’re at it: discuss some of the parallels between L. Frank Baum’s The Wizard of Oz and the bimetallism debates at the end of the 19th century. Are you persuaded? Or do some economists just have too much time on their hands?
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Answer:
The US Constitution established both gold and silver as the basis of US currency: that is to say, it established a bimetallic standard for currency. This remained in place for about a century, until the Coinage Act of 1873, which embraced a "gold only" standard, a monometallic standard, effectively dropping silver as the basis of currency. Over the next several decades, advocates of bimetallism and advocates of the "gold only" standard fiercely debated.
The "gold only" advocates, such as William McKinley, argued that shifts in the relative value of the two precious metals could lead to wild fluctuations in the values of currency in a bimetallic system. Early in the United States history, Alexander Hamilton had tried to fix the gold-silver exchange rate by fiat, but of course, such restraints only inhibit the natural development of a free market.
Unemployment was high in the depression caused by the Panic of 1893, and many argued that these economic challenges had been triggered by abandoning bimetallism. One of the more prominent advocates of bimetallism was William Jennings Bryant: indeed, bimetallism was the very center of his presidential campaigns in 1896 and 1900, both of which he lost to McKinley. Bryant articulated the popular view that a "gold only" standard limited the money supply, and thus favored those who were already quite wealthy, against the interests of working people of all professions. He famously expressed this argument in his "Cross of Gold" speech at the 1896 Democratic National Convention, in which he argued that continuing the "gold only" standard would "crucify" the honest laboring classes on a "cross of gold."
Despite the eloquence of Bryant's arguments, history strongly favored the "gold-only" standard. The argument that increasing the money supply would lead to greater prosperity strikes us now as naïve: of course, we now understand that increasing the monetary supply can lead to runaway inflation, which hurts everyone. Furthermore, gold did not remain as limited as the advocates of bimetallism imagined. In the 1890s, scientists discovered a cyanide process that allowed workers to extract pure gold from much lower grade ore, thus significantly increasing domestic gold production. Additionally, the discovery of two immense gold deposits in South Africa substantially increased world gold supply. Thus, the "gold only" standard allowed for ample currency, and even robust prosperity in the 1920s, so bimetallism died a quiet death.