I was reading the Britannica encylopedia's article about Bimetallism and under the arguments put forth against it, they cite that bimetallism doesn't work without international cooperation. Could anyone explain to me why this is? I can't seem to find a succinct answer to my question.
2
-
2$\begingroup$ If two countries have different gold/silver price ratios then one metal will disappear from one country and the other from the other. $\endgroup$– HenryDec 9, 2020 at 10:40
-
$\begingroup$ One theory could be the so called: "Ricardo's comparative advantage". $\endgroup$– user28226Dec 9, 2020 at 11:26
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
5
Quoting Wikipedia:
Bimetallism[a] is a monetary standard in which the value of the monetary unit is defined as equivalent to certain quantities of two metals, typically gold and silver, creating a fixed rate of exchange between them.[3]
Let's suppose that France says 1 ounce of silver is F1 (1 franc) and one ounce of gold is F80. And let's suppose that Germany says 1 ounce of silver is DM1 (1 Deutschmark) and one ounce of gold is DM79.
Anyone with an ounce of gold and a bit of common sense will go to France, convert it to francs (80 francs), convert it to silver (80 ounces), go to Germany, convert it to Deutschmarks (80 Deutschmarks) and convert it back to gold (1 ounce + 1 Deutschmark left over). Then they'll do it again. Over and over and over and over. Every time, they get an extra Deutschmark. Until France runs out of silver or Germany runs out of gold.
The only way this can be stopped, is if every country uses the exact same ratio - for example, if they all agree that 1 ounce gold = 80 ounces silver. That is international cooperation.
-
$\begingroup$ As a side note: even if cooperation exists, the system falls apart when supplies of gold and/or silver start to change. E.g. a big discovery of silver would reduce the value of silver, so now you have 1 currency unit = 1 ounce gold = 81 ounces silver. So now it's really just a gold standard. $\endgroup$– DanielDec 9, 2020 at 18:56
-
$\begingroup$ @Daniel That depends on people being willing to accept that value. I.e. someone has to be willing to give me more than 80 ounces of silver for each ounce of gold I bring them. $\endgroup$ Dec 9, 2020 at 22:45
-
$\begingroup$ True. But that seems unavoidable, especially if the amount of silver increases a lot. $\endgroup$– DanielDec 9, 2020 at 23:38
-
$\begingroup$ I suppose the only people willing to do that would be speculators who are trying to make the government run out of gold. Otherwise, they could just go to the government and get a better price. $\endgroup$ Dec 10, 2020 at 15:19
-
$\begingroup$ True about the speculators. As for ordinary citizens, that would depend on how much silver is found and how much gold the government has. Anyway, tis all moot with everyone now using fiat currency. $\endgroup$– DanielDec 12, 2020 at 20:08