GLOBAL BUSINESS FINANCE
SANGITHA S. - 1111222
THE LIMITS OF BIMETALLISM
By Christopher M. Meissner ,
University of California, Davis and NBER
Bimetallism refers to a monetary standard or system based upon the use of two metals, traditionally gold and silver, rather than one (monometallism). This paper focuses on the factors which led to the decline of bimetallism as an international monetary standard. In the late 19th Century, bimetallism was replaced with monometallism as countries began to peg their currency to one metal, either gold or silver. Many reasons contributed to this. Bimetallism follows the Gresham’s Law. (Gresham’s law-When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation). It is not possible for two metals to be in use simultaneously if the price of gold in terms of silver is not equal in the markets as well as the government mint. The existence of a difference in the values in the market and the mint, the metal lower in value, ie. the depreciating metal, will displace the other metal in the country. Hence, the country will be left with more of the depreciated metal. However, this law did not operate in France for nearly 20 years till before 1872, even though more gold mines were found in California, thus depreciating the value of the gold. In 1872, Germany, Sweden, Denmark, Norway, Holland and the US switched to the gold standard. Hence, in 1873, France, which was the largest bimetallic country in the world, restricted the usage of silver so as to not “swallow” Germany’s silver, and thus lose its entire gold circulation. France purposely did not buy large quantities of silver from Germany, due to the recently concluded France-Prussia war, and also France wanted to make the switch to the gold standard...
Please join StudyMode to read the full document