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Why the market ratio did not move for 75 years ?
The fact that the market ratio was very stable despite the massive
gold discoveries of the1850's is the consequence of a simple arbitrage. On the  you see that if silver is more valuable
(relatively to gold) on the bullion market (following, for example, gold discoveries),
then people will melt silver coins to exchange them for gold on the market, and other
people will bring gold to the Mint to coin it. You see that this will drain silver from
the monetary metal stock, and will add it to the non-monetary uses. Conversely, gold will
flow from the place it is cheapest (non monetary uses) to the place where it is more
expensive (at the Mint). The imbalances can thus be corrected and the market price be kept
in line with the legal price as long as there are big enough countries on a bimetallic
standard with the same ratio. Otherwise One metal will be totally drained from the
monetary base and what will be left is a monometallic standard.
Did you understand ? The next slide will
explain you the same thing from an agent's point of view. |
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