Bi-metallism

Historically, Bi-Metallism was a currency standard that pegged currencies to two different metals, commonly silver and gold. The standard became largely unpopular and died out over the course of the 19th century as governments and empires became more acutely aware of the serious flaws inherent in it. The biggest problem with the system is articulated in Gresham's Law and it goes like this. Once someone became aware of the discrepancies between the market price and the official value of gold or silver, it was extremely easy to take advantage, and profit from the system. For example, a mint would issue a certain rate for silver and gold. Say the official bank/mint rate for silver was 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 their gold for silver. They would then have more silver than they originally had to begin with. Repeat this cycle enough times and you make a significant profit. They would return to the bank with a higher quantity of silver and get gold and return to the market. With enough people doing this, one of the two metals would quickly go out of circulation in the domestic market. The mint takes in a lot of silver as everyone wants to exchange for gold so that they can turn a profit in the international market. The result is that the undervalued currency, gold, gets sucked out to 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 the fact that both are resources and fluctuation in price level is a natural inevitability of the laws of supply and demand. It grew increasingly difficult to change the official exchange rate to accord with the market value because people would lose faith in the system and credibility would be undercut severely, not to mention the power over changing the rate would be viciously contested and subject to corruption. People realized this problem fairly quickly, however, at the time, the standard was popular because certain countries had lots of silver and certain countries had lots of gold and if you wanted to trade with them, it was fairly crucial to have these exchange rates. Britain wanted a bi-metallic currency standard because France had silver and Mexico had gold and they wanted to trade with both of them without extreme transaction costs. When Sir Isaac Newton overvalued gold, he caused silver to be abandoned and sent out to foreign markets where it was cheaper relative to gold. The gold standard took over from the bi-metallic as the central exchange rate mechanism.