RTFA: http://en.wikipedia.org/wiki/Bland-Allison_Act

The Bland-Allison Act of 1878 was a United States federal law enacted in response to the Fourth Coinage Act (called by opponents “the Crime of 1873″) demonetizing silver. Representative Richard P. Bland of Missouri and Senator William Allison of Iowa co-authored a bill that would re-allow the coinage of silver. It had the following provisions:

The U.S. Treasury would purchase quantities of bullion valued between $2 million and $4 million per month.
The silver would be purchased at market prices, not at a predetermined ratio tied to the value of gold.
The silver would be used to make coins at ratio of 16:1 to gold. In other words, 16 ounces of silver would be equivalent to one ounce of gold, regardless of the metals’ respective market values.

This compromise was part of a struggle between the silver and bimetal-standard groups and the gold standard forces who tried to repeal it altogether. Rutherford B. Hayes, who was influenced by industrial and banking interests, vetoed this act because he did not agree with the inflation that it would cause. [citation needed] Congress overrode the veto.
However, the Hayes administration blunted the impact of the law. The Treasury Department never actually bought more than the $2 million minimum amount[citation needed] and never circulated the silver dollars. The Bland-Allison Act was replaced in 1890 by the Sherman Silver Purchase Act.
Gold remained the larger feature between both legislations. The term “limping bimetallism” has been used to describe this program.

The consequence of this, along with legislation that “responded,” was to cause the depletion of the US Federal gold reserves. It is clear how this legislation would inevitably lead to gold/silver arbitrage against the value of gold.

It all culminated with the Panic of 1893:

People attempted to redeem silver notes for gold; ultimately the statutory limit for the minimum amount of gold in federal reserves was reached and U.S. notes could no longer be successfully redeemed for gold. The investments during the time of the Panic were heavily financed through bond issues with high interest payments. The National Cordage Company (the most actively traded stock at the time) went into receivership as a result of its bankers calling their loans in response to rumors regarding the NCC’s financial distress.

A series of bank failures followed, and the price of silver fell. The Northern Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka & Santa Fe Railroad all failed. This was followed by the bankruptcy of many other companies; in total over 15,000 companies and 500 banks failed (many in the west). About 20%-25% of the workforce was unemployed at the Panic’s peak.

By 1900, McKinley had moved the country to the gold standard, and in 1913, Wilson created the Federal Reserve. In the early 1970s, Nixon would renege on the terms of the Bretton Woods system (created at the close of World War II to regularize global economic systems around the exchange of gold), when he eliminated the gold backing of US currency (also known as the Nixon Shock).

The 1973 Oil Crisis, which is inextricably tied to the Nixon Shock, had the following effects on global monetary systems:

On August 15, 1971, the United States pulled out of the Bretton Woods system in the so called Nixon shock. The result was a depreciation of the value of the US dollar against many other currencies. Since oil was priced in dollars this meant that oil producers were receiving less “real” income for the same price. In the years after 1971, OPEC was slow to readjust prices to reflect this depreciation. From 1947-1967 the price of oil in U.S. dollars had risen by less than two percent per year. Until the Nixon shock, the price remained fairly stable versus other currencies and commodities, but suddenly became extremely volatile thereafter. OPEC ministers had not developed the insitutional mechanisms to update prices rapidly enough to keep up with changing market conditions, so their real incomes lagged for several years. The large price increases of 1973-74 largely “caught up” their incomes to Bretton Woods levels in terms of other commodities such as gold.

As the price of petroleum (a commodity) adapted to the price of gold (no longer an aspect of the international monetary system, but merely another industrial commodity), the US monetary system came to depend on the value of the commodities it could purchase.

The fluctuation in petroleum prices is now inversely related to the purchasing power of the US dollar. What an asinine conclusion to silver/gold arbitrage of the 1890s… but arguably, the modern US dollar is a better measure of actual value.

The fundamental error in the current monetary system is in the assumption that the value of commodities is regulated by free market exchange, which is assumed to be free from non-market influences. Of course, this isn’t the case at all, because political systems are deeply embedded into the international exchange of commodities, and vise-versa.

For better or worse, the United States executive branch is currently managed by a serial petroleum entrepreneur: Bush was a partner or CEO in Arbusto Energy, Spectrum 7, and Harken Energy. Cheney, in his capacity as CEO of Halliburton, oversaw the activities of KBR, one of the world’s premiere oil industry construction companies.

If anyone is going to understand the fundamental mechanisms of the US monetary system, by way of understanding the commodities that it is based on, then Bush and Cheney are probably some of the best fellows for the task. However, this intermingling of politicial and industrial interests obviously threatens the fundamental assumptions of the free-market exchange of commodities.

The current US dollar is perhaps a “fairer” metric of value than gold-based incarnations, but as the wild post-2002 fluctuations in petroleum prices indicate, the value of the US dollar is anything but stable at the scale of a decade-by-decade analysis.