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# Bimetalism is better than Fiat Money

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DanT
 Voting Style: Open Point System: 7 Point Started: 6/6/2013 Category: Economics Updated: 4 years ago Status: Post Voting Period Viewed: 2,193 times Debate No: 34570
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 Con Defintions(n) fiat money (money that the government declares to be legal tender although it cannot be converted into standard specie)(n) bimetallism (a monetary standard under which the basic unit of currency is defined by stated amounts of two metals (usually gold and silver) with values set at a predetermined ratio) Rules:1.) No Ad Hominem Attacks2.) Dismissed arguements will be considered droppedDebate Format:1st round: acceptance only2nd round: Arguements / no rebuttals3rd round: Rebuttals / no arguements4th round: Defense against rebuttals & closing remarks / no new arguements or rebuttalsReport this Argument Pro I accept. I will argue the pro position that bimetallism is better than fiat money.Report this Argument Con 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. Report this Argument Pro It is better for a society to use a Bimetallism monetary system, rather than a Fiat monetary system. In a Bimetallism system, there is a finite amount of money. Money is the resource for trade. The amount of a resource regulates the use of said resource. The amount of money in existence will regulate the amount of trade. Having a finite amount of money will create a closed system. In a closed system the elements of that system will self-regulate to make the most efficient use of resources. In Bimetallism the amount and speed of trading will be self-regulating. The amount and speed of trading dictate the size and speed of a population's growth. Bimetallism will allow a society to self-regulate its growth to its most efficient size. This would be good for a society. A Fiat monetary system allows money to be created. Allowing money to be created creates an open system. An open system allows an outside force to affect the elements inside it. Allowing an outside force to affect a system removes the systems ability to self-regulate itself. When a system cannot self-regulate it is at the mercy of the outside force that can affect it. A Fiat monetary system would cause the society using it to be at the mercy of the outside force that could create and destroy money in order to manipulate it. This would be bad for a society.Report this Argument Con Money Pro claims that “money is the resource for trade” and that “the amount of money in existence will regulate the amount of trade”. As I stated in the previous round, Money is a medium of exchange, and the only relevance it has on the market is its effect on the price. The monetary supply does have a relationship to the aggregate demand. More money decreases the velocity of money, which increases the aggregate demand for goods and services. A greater aggregate demand drives up prices, and increases economic output. A decrease in the money supply reduces aggregate demand. When transactions increase, and the monetary supply remains the same, it means there is an increase in aggregate supply with no change in aggregate demand. The increase in the interest rate decreases the monetary demand, by encouraging savings, and by deterring investments in the stock market. The Monetary Supply Pro claims that bimetallism is better because the monetary supply is limited to the value of gold and silver, but Pro’s only reasoning for this, is that money becomes self-regulating. As I have already pointed out in the previous round, this is not always a good thing. If the amount of money is limited to the supply of gold, it cannot expand to the growing monetary demand. This would lead to an increase in the velocity of money. In other words, the same unit of currency would circulate more frequently within the economy. When the velocity of money increases, it creates deflation, and increases the interest rate. An increase in the interest rate hurts the stock market, and encourages savings. The changes in the supply of gold & silver are not reflective of the changes in aggregate transactions. The best monetary policy is a monetary supply that can expand in proportion to changes in the volume of transactions. Bimetallism can’t do this, but fiat money can. Outside Forces Pro claims that Bimetallism prevents the manipulation of outside forces. In actuality, outside forces can still manipulate the monetary supply under bimetallism. For example; fixing the exchange rate between gold and silver, will increase or decrease the monetary supply accordingly. Another example would be to fix the price of the metals themselves, rather than allowing a floating exchange between the currency and the base. If you fix the exchange between precious metals and the currency, there is a greater risk of default, because the reserves might not be enough to support the currency. If you allow a floating exchange, people would have less faith in the currency. If the currency was coins rather than promissory notes, it would be far less convenient to conduct trade. Report this Argument Pro Con is stating particular instances through history where monetary systems have succeeded for a while and where they have failed. One can find instances of societies failing with anything they do. This is because humans are flawed and make mistakes. Allowing the government (composed of people) to change how much money is circulating is giving them too much power. This could be good or it could be disastrous, depending on the people making the decision's judgment and motives. I am not arguing that societies of great size and scope should switch to a Bimetallism system. The debate was which was a better system. A newly forming society would be better to use Bimetallism because it would mean there was a limiting force controlling its growth so it couldn't be artificially manipulated to grow beyond its optimal size. Bimetallism would keep society more under natural laws which would be good.Report this Argument Con Defense Self-regulated currency vs government regulated currency Pro claims that government regulated currencies are subject to human error, and therefore they are bad. The thing is, self-regulated currencies are worse. Yes humans have the possibility for error, but humans are also sentient beings, that conceive and rationalize complex notions. A currency is not sentient, and can’t make rational decisions. This is tantamount to saying, “We should not farm agricultural goods, we should let the food supply self-regulate”. Yes we could forage for food, but it would not be enough to meet the demand. The apple trees won’t produce more apples, simply because there is a greater demand for apples. Gold and Silver are inelastic supplies, which means changes in price would not affect the supply of gold and silver. In other words, just because the demand for gold and silver increases does not mean the supply of gold and silver will also increase. This leaves the monetary supply completely vulnerable to the supply of gold and silver. Developing economies and bimetallism Pro claims that large economies will do better with fiat money, while smaller economies will do better with bimetallism. First off, this debate is not about what is better for smaller economies; it is about what is best in general. Furthermore, the assertion is completely false. While the monetary demand of larger economies requires a fiat supply of money, smaller economies would be hurt even worse by bimetallism. Take for example the American colonies, which I mentioned in earlier rounds. The reason the colonial script was implemented in the first place, was because there were no gold or silver mines in the colonies. When the Bank of North America switched us to the silver standard, Robert Morris had to acquire precious metals from France and the Netherlands, in order to back the currency. Developing countries don’t necessarily have the supply of precious metals to back bimetallism. This severely limits their monetary supply, and their potential for economic growth. Furthermore, developing countries would highly benefit from inflationary policies, and an excessive monetary supply. Inflation encourages imports, while deflation discourages imports. Imports bring capital into the country, which is required for economic growth. Aggregate Output is a function of labor and capital. Due to the law of diminishing returns, the potential Marginal Product of Labor is limited by the supply of capital, and the potential Marginal Product of capital is limited by the labor supply. In order to maximize the output of labor, developing countries need more capital. Because a monetary deficit causes deflation, and a monetary surplus causes inflation, developing countries would benefit from an inflated currency. Thus developing countries would highly benefit from fiat money, and would be crippled by the deflationary effects of bimetallism. Conclusion Bimetallism restricts the monetary supply, and cannot expand to the growing monetary demand. Fiat money is required to prevent deflation. Fiat money can adjust to the changes in monetary demand. Bimetallism hurts developing nations, by deterring the importation of capital, and restricting the efficiency of labor. Bimetallism can lead to deflation, which was the cause of the great depression. The deflationary effects of hard money led to the American Revolution, due to its negative economic impacts. Report this Argument Pro It takes a lot of words and explanation to rationalize a convoluted idea. It only takes a few words to demonstrate a intuitive idea. It is clear that bimetallism is a better monetary system for a society to start with; this will limit the size the population can grow to under natural laws of self-regulation. A self-regulated society will keep from growing past its optimal size.Report this Argument
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