Why a Biometallic Standard Works Best: Gold & Silver Explained

Key Concepts:

• Biometallic Standard: A monetary system where the value of currency is defined by a fixed quantity of two metals, typically gold and silver.
• Gold Standard: A monetary system where the standard economic unit of account is based on a fixed quantity of gold.
• Gold-to-Silver Ratio: The relative value of gold to silver, expressed as how many units of silver equal one unit of gold.
• Market Fluctuation: The natural rise and fall in the prices or values of assets due to supply and demand dynamics in a free market.
• Free Market: An economic system in which prices are determined by unrestricted competition between privately owned businesses.

The Efficacy of a Biometallic Standard

The discussion highlights that a biometallic standard is considered the most effective monetary system. This system typically utilizes both gold and silver as the foundational assets for currency, aiming to combine the benefits of both precious metals.

Historical Problem: Mandated Ratios

A critical historical flaw identified with the biometallic standard is the practice of human intervention in dictating the gold-to-silver ratio. Instead of allowing natural market forces to determine the relative values of gold and silver, past systems have often imposed an arbitrary, fixed exchange rate between the two metals. This top-down approach has historically undermined the stability and effectiveness of biometallic monetary systems.

Case Study: Sir Isaac Newton and the Bank of England

A significant historical example illustrating this problem involves Sir Isaac Newton during his tenure as the main banker for the Bank of England. Newton was instrumental in re-establishing the gold standard for England. However, he also imposed a specific, fixed gold-to-silver ratio. He famously determined, through observation rather than comprehensive market analysis, that "the going rate is 15.5 ounces of silver equals 1 oz of gold." This specific ratio was then mandated to be constant "always and everywhere," regardless of the actual market dynamics at play.

The Flaw of Fixed Ratios

The fundamental issue with Newton's approach, and indeed with any system that mandates a fixed ratio, is its failure to account for market fluctuation. The values of precious metals like gold and silver are not static; they are dynamic and constantly shift based on supply and demand. As the speaker points out, the natural ratio could vary, sometimes being "16, sometimes it could be 15, sometimes be 15 and a half." A fixed ratio ignores these inherent market movements, leading to economic imbalances and inefficiencies within the monetary system.

The Solution: Market-Determined Ratios

The proposed solution to overcome this historical challenge is to allow the free market to establish the gold-to-silver ratio. By permitting the natural forces of supply and demand to dictate the relative value of gold and silver, the monetary standard becomes more resilient and adaptable. When the market is allowed to set this ratio, the result is described as a "pretty well-worked monetary standard that has both gold and" (implying a stable and functional biometallic system incorporating both metals).

Conclusion

In essence, while a biometallic standard is presented as an optimal monetary system, its ultimate success is contingent upon allowing free market forces to determine the gold-to-silver ratio. Historical attempts to mandate this ratio, such as those by Sir Isaac Newton, have proven ineffective due to the inherent dynamism and market fluctuation of precious metal values. A flexible, market-driven ratio is therefore crucial for establishing and maintaining a stable and well-functioning biometallic monetary system.