When two metallic standards are operating simultaneously in a monetary system, it is referred to as “bimetallism.” Under bimetallism, two types of standard coins from two different metals say, gold and silver, are minted.
Both the types of standard coins are regarded as unlimited legal tender and a fixed ratio of exchange based on mint-parity is prescribed for them. There is also free coinage of both the coins and their import and export as a means of international payment are also unrestricted.
During the nineteenth century, bimetallism (of gold and silver coins) was in vogue in Western Europe and America. The U.S.A. adopted it under the Coinage Act of 179. France had adopted bimetallism in 1803. It was gradually abandoned by the end of the 19th century.
The following are the main advantages of bimetallism:
1. Adequate money supply is assured by two types of standard coins.
2. Money supply becomes more elastic under bimetallism.
3. Compared to monometallism, bimetallism ensures greater stability in the value of money owing to automatic adjustment in demand and supply of money.
4. It stimulates a country’s international trade on two counts: (i) the country can have easy trading with Gold Standard as well as Silver Standard countries; (ii) there are no restrictions on imports and exports due to the free outflow and inflow of both the types of standard coins.
5. Bimetallism facilitates maintenance of exchange rate parities between currencies of monometallic as well as bimetallic standards.
The main drawbacks of bimetallism are as follows:
1. Adoption of bimetallism calls for unlimited metallic reserves (of gold and silver).
2. It is also a costly standard which poor countries cannot afford.
3. Compensatory action of bimetallism for price stability is illusionary and impractical. There will not be automatic adjustment between supply and demand for money. Hoarding, exporting of relatively dearer metal will aggravate the problem.
4. It may lead to a great confusion and tussle in the settlement of transactions when one party insists on payment in terms of a particular type of coins only.
5. It is also difficult to maintain equality between mint parity exchange rates and market rates of two metals.
6. It encourages speculative activity in the two metals, causing fluctuations in their prices.
7. It provides a greater scope for the operation of Greshman’s Law. Over-valued metal at the mint will remain in circulation and under-valued coins at the mint will disappear when there is a disparity, between the mint parity rate and the market rate of exchange of the two metals. It thus gradually tends to practice monometallism, either gold or silver.