The cornerstone of the theory of bimetallism is the doctrine of the compensatory action of the double standard, and its chief strength consists in the fact that the basis of this doctrine is sound and admitted by all. There can be no doubt that under a bimetallic system a substitution of one metal for the other for monetary purposes would be possible and would take place to a certain extent whenever the market value of either was seriously affected. The important question is, how far would this substitution go, and to what extent would the relative value of gold and silver be affected by it? A consideration of this question will reveal one of the weak points in the theory.

The bimetallists assume that gold and silver are indefinitely interchangeable for monetary purposes, and that the only limit to the possible substitution of one for the other in case of a threatened change of market ratio is the entire discontinuance of the monetary use of the metal which has become relatively dearer. Is this true? Is it not at least conceivable that the dearer metal might still continue to serve as money, but at an enhanced valuation as compared with the cheaper? For example, suppose that, the legal ratio being 16 to 1, the market ratio becomes 18 to 1 on account of a fall in the value of silver, might not gold still continue to be used for monetary purposes, but at a value as compared to silver of 18 to 1 instead of 16 to 1? The bimetallists assume that the law which declares coins of the two metals legal-tender at the latter ratio would prevent this, but in so doing they greatly overestimate the power of a legal-tender law. In spite of such legislation, money-changers, bankers, and others who have occasion to use large quantities of gold for monetary purposes might agree to continue to use it in the form of bullion, but at an enhanced value. Contracts involving the exchange of money which were made before the change would be settled on the basis of the cheaper metal, but not necessarily by means of it, and future contracts could and would be made on the same basis, but might perfectly well be settled in gold at its new value. A contract to pay money under the bimetallic system would not differ materially from that of a farm lease in which the lessee is allowed the option of paying his rent either in wheat or potatoes, one bushel of wheat being regarded as equivalent to two bushels of potatoes for this purpose. If, when pay-day arrives, one bushel of wheat is worth three bushels of potatoes, the farmer will certainly make his payment in potatoes, unless his landlord is willing or prefers to take wheat at its new valuation. If the landlord should really want the wheat and not the potatoes, there is no reason why such an arrangement should not be made. It might be more convenient for both parties. In like manner, under the bimetallic system, the law gives the debtor the option of paying either in gold or silver at a given ratio, and, in case of a change in bullion values such as we have assumed above, authorizes him to pay in the cheaper metal, but it does not prevent his making other arrangements with his creditor. The question here at issue is really one of facts, and on that account there is plenty of room for difference of opinion. Is there any reason for supposing that under a bimetallic system gold might still continue to be used for monetary purposes, even if its market value in relation to silver were considerably higher than that fixed by law?

In a previous chapter we have attempted to show that gold has certain peculiar monetary uses, and that for these it is better than silver or any other metal. This superiority for certain purposes would not be affected in the slightest degree by the establishment of the bimetallic system, though the use of gold coins in the general circulation at a value different from that expressed by the figures or statements on their faces would be rendered difficult and impracticable for most people. Its use in the payment of international balances and for shipment between different cities in the same country would not be rendered more difficult or less convenient by the fact that its bullion rather than its tale value must be considered. In fact, in international payments its bullion value alone counts, no matter what may be the monetary system, and in great financial institutions like the Bank of England coins are always received by weight in order to guard against loss from abrasion. The fact that gold can be shipped and stored at considerably less cost than silver would give it a preference, for the uses here under consideration, which is quite independent of legal-tender laws and which would not be affected by a divergence between the bullion and the legal ratio under a bimetallic system.

Speculation regarding what would happen if the bimetallic system were introduced and the value of silver should subsequently fall is not the most profitable of occupations, but in this instance it serves to show the weakness of the foundation upon which the bimetallists have constructed their main argument. If the substitution of silver for gold cannot be carried to the extent that they claim, then it becomes highly improbable that bimetallism would be able to maintain a fixed ratio between gold and silver. If it cannot accomplish this, it is powerless to cure the evils of the present system.

Many people believe that the real effect of bimetallism would be to introduce what has been called an alternating standard, now of one metal and now of the other. Since gold and silver are constantly fluctuating with reference to each other, they hold that no ratio established by law could be long maintained, and that the metal which became relatively cheap would be the real standard, the other being used as bullion. Therefore, if now one and now the other metal should become cheaper, as measured by the legal ratio, we should have an alternating standard. This would certainly be the result if the claims of the bimetallists regarding the effect of the compensatory law should not prove true.

Another weak point in the theory of bimetallism consists in the assumption that frequent minor fluctuations in prices are less injurious than greater fluctuations occurring at longer intervals. Even if the compensatory action should be sufficient to maintain a fixed ratio between the precious metals, it could not prevent a change of prices whenever any considerable change in the conditions of production or consumption of either of the metals should take place. Under the monometallic system gold-standard countries would suffer only from fluctuations in the value of gold, and silver-standard countries from fluctuations in the value of silver; but with bimetallism both classes of nations would suffer whenever either metal was affected. All that is claimed for this latter system by its most strenuous advocates is that the effects of any change are lessened by being spread over a larger surface, but it is at least questionable whether this advantage is not dearly purchased at the price of more frequent disturbances. If we grant that during the last thirty years gold has appreciated considerably, and that gold-standard countries have suffered in consequence, we must not forget that, had bimetallism been established during this entire period, these countries would have been exposed to price changes from the numerous and violent fluctuations in the value of silver as well as from the appreciation of gold, the difference being that prices would probably have oscillated up and down at frequent intervals instead of having experienced a gradual and steady downward movement. The choice between these two alternatives is not easy. Some people would doubtless prefer the one, and some the other. Business men in general would select a steady movement in one direction, which can be counted on and provided against, to the uncertainty involved in more frequent and complicated movements in different directions, against which they would be practically powerless to protect themselves.

It must, of course, be admitted that the compensatory action of the double standard might be just sufficient to counteract the tendency of one of the metals to rise in value or of the other to fall, as in the hypothetical case assumed by Mr. Barbour, but such an effect would be the merest chance, and would rarely, if ever, be experienced.

It is difficult to analyze the effects of any change of prices, and consequently not easy to determine whether one kind is better or worse than another, but a currency change which would still further complicate the situation cannot be recommended. That this would be the effect of bimetallism is certain. It would be next to impossible to determine in a given case precisely how the compensatory law had been operating, and to what extent a given change in prices was due to currency and to what extent to other causes. It is difficult now; it would be practically impossible under bimetallism.