Bi-metallism

Historically, Bi-Metallism was a currency standard that pegged currencies to either silver or gold. The standard became largely unpopular and died out over the course of the 19th century once governments and empires became aware of its inherent flaws. Its most apparent problem is articulated in Gresham's Law. According to Gresham, once a person becomes aware that there are discrepancies between the market price and the official value of gold or silver, it is extremely easy to take advantage and profit from the system. To better understand this theory, take the example of a mint, which would issue a certain rate for silver and gold. Say the official bank or mint rate for silver is higher than the global market price for silver. Anyone looking to make a profit could trade in their silver for gold at the mint rate and then go to the global market and trade in his or her gold for silver. They would then have more silver than they originally had to begin. A significant profit can be reaped if someone abuses his or her knowledge of this inconsistency. If enough people do this, the circulation of silver or gold could potentially dissolve from the domestic market. Silver generally flows readily into the mint, as the majority of consumers would rather exchange it for gold with the hope of turning a profit in the international market. As a result, gold, as the undervalued currency, gets sucked into foreign markets where it is valued higher. This discrepancy was unavoidable because official values of gold and silver were fixed while the prices of gold and silver fluctuated due to their resource-status. Fluctuation in price level, however, is a natural inevitability of the laws of supply and demand.

It grew increasingly difficult to change the official exchange rate to agree with the market value because the credibility of the system would be shaken, and people would lose faith in the ability of outside actors to manually regulate the market. Furthermore, the justification for someone who has the power over changing the exchange rate would be viciously contested and seem extremely corrupt.

People understood that there was a problem with Bi-Metallism fairly quickly, however, at the time, the standard seemed enticing. Numerous countries had either mass amounts of silver, or mass amounts of gold, and it was vital to ascertain exchange rates with which to trade. Britain advocated for a bi-metallic currency standard because France had silver and Mexico had gold and Britain wanted to trade with both countries without extreme transaction costs. When Sir Isaac Newton overvalued gold, silver to be abandoned and dispersed in foreign markets where it was cheaper relative to gold. The gold standard took over after the collapse of the bi-metallic standard system as the central exchange rate mechanism.