Introduction and summary
In 1900 L. Frank Baum published a children's tale, The Wonderful Wizard of Oz. In it, a little girl from the Midwest plains is transported by a tornado to the Land of Oz and accidentally kills the Wicked Witch of the East, setting the Munchkins free. Yearning to return home, she takes the witch's silver shoes (1) and follows the Yellow Brick Road to the Emerald City, in search of the Wizard who will help her. She and the companions she meets on her way ultimately discover that the wizard is a sham, and that the silver shoes alone could have returned her to Aunt Em. Littlefield (1964) and Rockoff (1990) have decoded Baum's tale as an allegory on the monetary politics of late nineteenth century America. The silver shoes are the silver standard, the witch of the East represents the "monied interest" of the East Coast, the scarecrow and the tin man are the farmers and workers of the Midwest, while the cowardly lion is their unsuccessful champion, William Jennings Bryan. The yellow brick road is the gold standard, whose fallacy is exposed by Dorothy's triumphant return home borne by the silver shoes.
William Jennings Bryan, as nominee of the Democratic Party in the presidential election of 1896, campaigned on a platform to reverse the so-called "crime of 1873." The phrase referred to the change in the United States' monetary system from bimetallism, in which gold and silver are used concurrently, to the gold standard. Bryan lost, and in 1900 a law was passed firmly committing the United States to the gold standard. The bimetallic controversy soon died away. The United States had taken the yellow brick road.
In this article, I recount the historical background to the bimetallic controversy, replacing it in its international context. Bimetallism, which until 1873 had been the system in a number of other countries, disappeared abruptly. I use a model to understand how bimetallism could have been viable in the first place, why it disappeared so suddenly, and whether the United States could have taken another road.
I begin with some definitions. A commodity money system is a monetary system in which a commodity (usually a metal) is also money; that is, the objects that serve as medium of exchange are made of that commodity. The essential feature of such a system is that the commodity be easily turned into money and back. This requires: 1) unrestricted minting, in the sense that the public mint always be ready to convert any desired amount of metal into coin; and 2) unrestricted melting and exporting, allowing money to be converted into the commodity, or into other goods at world prices.
A commodity money system based on gold or silver is also described as a gold or silver standard. In such a standard, the medium of exchange may not be limited strictly to coins, but may include notes (privately or publicly issued), as long as the notes are convertible on demand and at sight into coin.
The double standard is one where both gold and silver are money. This is also called a bimetallic standard, or bimetallism. The characteristics of bimetallism include:
1. Concurrent use of gold and silver as money,
2. Free minting and melting of both metals, and
3. A constant exchange rate between gold and silver coins.
Condition 1 usually means that both gold and silver coins are unlimited legal tender. Any limitation on the size of debts that can be paid in coins of either metal is therefore a departure from condition 1.
All three characteristics should be present to have a proper bimetallic system. For example, conditions 1 and 2 alone define a regime where one metal is the standard (say, silver) and the price of the gold coin is not fixed, but varies according to the market. The fluctuating coin is called trade money. Conditions 1 and 3 alone, but with only one metal freely minted, result in a limping standard. …