Bimetallism is a monetary system in which the standard money is composed of gold and silver, the two metals that civilized nations have used as standards of value in modern times. It is known also as the "double standard" as distinguished from the "single standard," where only one commodity is used as the standard of value. Under a bimetallic system the mints are open to the unlimited coinage of both metals at a fixed ratio of exchange established by law and both metals are legal tender in unlimited amounts, thus giving people the option of making payments in either gold or silver. Bimetallism means, then, not the mere use of both metals as currency, but the use of both as standard money.
Bimetallism necessitates the fixing of a definite ratio of the weight of gold in the dollar or monetary unit to the weight of silver in the unit, but since both metals fluctuate in response to market conditions, the values of the two coined metals refuse to coincide at any fixed ratio for long at a time. It must be understood that the stamp of the government or of the mint upon standard coins does not give them value; the stamp is simply the certification that these coins contain a certain weight of coin of a specified fineness. Under our coinage system the silver dollar contains 371 1/4 grains of pure silver, or 412 1/2 grains of silver 9/10 fine; the gold dollar, if actually coined, would contain 23.22 grains of pure gold, or 25.8 grains of gold 9/10 fine. Their weights are then approximately as 16 to 1. The silver dollar contains sixteen times as much pure metal by weight as the gold dollar, and this is known as the coinage or mint ratio. The ratio of the two metals as bullion in the open market is spoken of as the market or bullion ratio. Official coinage laws have generally fixed the mint ratio of gold and silver at the market ratio prevailing at the time, but without providing a practicable method of changing the official ratio to conform to changes in the market ratio.
Now, if the legal ratio between gold and silver is fixed at 16 to 1, that is, if the mint coins 16 ounces of silver into as many dollars as 1 ounce of gold while an ounce of gold bullion sells in the open market at the same price as 17 ounces of silver, people will not take gold to the mint. At the mint they can get for an ounce of gold only as many dollars as for 16 ounces of silver, but in the market they can exchange it for 17 ounces of silver. Obviously a profit can be made by exchanging the gold for silver bullion and taking the latter to the mint to be coined into dollars. Furthermore, it will be profitable under these conditions to melt existing gold coins into bullion and exchange it for silver to be sent in turn to the mint.
If, on the other hand, the market price of 15 ounces of silver bullion is equivalent to 1 ounce of gold, while the mint ratio is 16 to 1, no one will take silver to the mint. It will be more valuable as bullion than as coin, and silver coins will disappear from circulation just as in the other case gold coins disappear. "When the mint ratio and the actual market ratio of the two metals do not agree, and as a consequence one of them is withheld from the mint, it is said to be undervalued, while the other is overvalued. Experience has shown that a small variation between these ratios will cause the undervalued metal to be withheld from coinage, while the overvalued metal will be presented freely to the mints to be coined and in time will drive the other out of circulation.