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Comment: Gresham's Law is the answer to your question

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Gresham's Law is the answer to your question

In bimetallism the government fixes the ratio between gold and silver. In other words, they fix their relative prices. The problem is that over time the market prices of gold and silver change, while the fix remains...well, fixed. For example, suppose they fix the G:S ratio at 1:20, one ounce gold to twenty ounces silver. Suppose one year later the market prices of gold and silver have changed such that the market ratio is 1:23. Now gold is officially undervalued: i.e. the government values one ounce gold at 20 ounces silver, while the market values one ounce gold at 23 ounces silver. Now suppose you owe $1 in taxes to the government. Suppose the dollar is defined as 1/10 ounce gold or (per the 1:20 fix) 2 ounces silver. Given a market ratio of 1:23 gold to silver, would you pay your taxes in gold or silver? Suppose you have 1/10 ounce gold. You could pay your tax with this and have nothing leftover or you could sell this on the market for 23 ounces of silver, pay the government 20 ounces, and have 3 ounces of silver leftover. Thus, since silver is official overvalued (gold officially undervalued) you would choose to pay your tax (or any other debts) in silver rather than gold. This is why bad money (overvalued money) drives good money (undervalued money) out of circulation; in this case, silver drives gold out of circulation.

This is an inherent problem if bimetallism. Over time, the fix will inevitably get out of step with market prices, and one or the other metal (whichever is undervalued) will start to disappear from circulation.

So why did so many people support bimetallism in the 19th century? Essentially, they wanted inflation. They wanted silver to be re-monetized at a higher fix: i.e. to increase its purchasing power. The interests behind this were, among others, the western silver mining communities, as well as debtors who always like inflation for obvious reasons. The same interests behind the push for bimetallism later supported fiat money inflation - the goal was inflation, bimetallism was just a means to that end.

I;m not specifically familiar with Milton Friedman's view of bimetallism, but he was a proponent of "price level stability." He thought price deflation was bad in itself, and that the government should promote a steady annual inflation to avoid it. this is, of course, nonsense. Anyway, I assume that;s why he would have supported bimetallism, because of its inflationary consequences.

By the way, the panic of 1873 was caused by the same thing that causes all panics: a preceding inflationary boom. You have to understand, even though there was a gold standard, there was substantial inflation at various times in the 19th century, thanks to the national banking system (quasi-central-banking) created during the civil war. Moreover, the panic was real, but the long depression which mainstream economic historians says followed is a myth. They assume a depression occurred because prices were falling. What they don;'t appreciate is that prices falling is the natural state of affairs in a growing economy where the money supply is more or less fixed. By all measures of industrial activity, the period following 1873 was enormously prosperous: huge increase in output, huge increases in real wages, etc.

http://wiki.mises.org/wiki/Long_Depression

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