Bimetalism is better than Fiat Money

Money To understand this debate we must first understand what money is. Money is a medium of exchange. The only relation money has to tangible goods, is the price of those goods; this can be expressed mathematically as the quantity theory of money. With bimetallism, gold and silver is used as a medium of exchange, due to their value. With fiat money, the currency has no real value. The value of the currency itself is not important, but rather the supply of the currency, because currency is just a medium or representation of other goods and products. The Math The Monetary Supply is comprised of all cash and deposits within the economy. The Monetary demand is comprised of all the capital within the economy multiplied by the volume of nominal transactions. From this point on I will refer to the monetary supply as “M”, the monetary demand as “MD”, capital as “k” and nominal transactions as “nT”. The interest rate or price of money is determined by the equilibrium of M and MD. M is the quantity of money, because the supply of money is inelastic. The velocity of money is the measure of nT per M, therefore M is equivalent to the volume of nT divided by the velocity of money. From this point on I will refer to the velocity of money as “VT”. The problem with bimetallism is that M is tied to the supply of gold and silver. As such, the supply cannot adjust to changes in the demand. If M remains constant, while nT increases, than VT increases. An increase in VT means the same unit of money is circulating more frequently within the economy. An increase in VT results in deflation, while a decrease in VT results in inflation. When prices deflate it causes the interest rate to increase, thereby encouraging savings. Deflation not only reduces prices, but also reduces wages; a reduction in price does not necessarily mean you can buy more. Deflation causes people to default on old debts, it causes businesses to loss profits, and it ultimately results in an economic recession. The History The Currency Act Prior to the Currency Act of 1764 the American colonies used fiat money known as “colonial script”, which were bills of credit that bore no interest. At the time the colonies were prosperous, while the British were in economic recession. While in London Benjamin Franklin was asked about the colonial poor houses. Franklin responded that “We have no poor houses in the Colonies; and if we had some, there would be nobody to put in them, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.” When the British asked Franklin to explain why the colonies were so prosperous, Franklin replied that “In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods and pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one.”[1] Unlike the colonies, which used soft fiat money, the British used hard money. The Currency Act of 1764 banned the use of fiat money, and was one of the major causes of the American Revolution. Within a year, the reduction in the monetary supply forced the colonies into economic collapse. [1] Franklin commented that “The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”[1] The Ratio between Gold and Silver Other than the limitations of the monetary supply, there are other issues with bimetallism. One such issue is the exchange rate between gold and silver. If there is a floating exchange rate between gold and silver, changes in the price of both metals can result in dire fluctuations of the monetary supply. After the adoption of the US constitution, Alexander Hamilton attempted to remedy these fluctuations with a fixed exchange rate between gold and silver. Years later, the Gold Rush caused an increase the supply of gold, thereby increasing both the value of silver and the monetary supply; the increase in monetary supply caused economic inflation. [2] In order to reduce the monetary supply congress banned the use of silver as medium of exchange. The Great Depression The Great Depression was caused by rapid deflation due to the limitations of the monetary supply. In order to increase the monetary supply FDR outlawed the private ownership of gold, so that the government could increase the gold reserves of the FED. The Superiority of Fiat Money Unlike Bimetallism, fiat money is capable of adjusting to changes in demand. More money can be printed as the economy grows. If and when the economy declines, the fiat currency can be collected and destroyed. Because fiat money is capable of adjusting to the changes in monetary demand, fiat money is much more economically sound. http://www.youtube.com... http://21stcenturycicero.wordpress.com... http://econpapers.repec.org...