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Tuesday, 22 November 2011

Define bi-metallism what are the advantages and disadvantages or merits and demerits of bimetallism

The monetary system where both gold and silver are standard metals and their ratio of exchange is fixed and maintained by law and they are also unlimited legal tender is called Bimetallism.

Following are the important advantages of this system.

1. Price Stability :-
In case of adoption of dual system stability in the price level can be achieved easily if at one time the total out put of gold falls, the supply of silver can be increased. If the supply of gold increases then the supply of silver can be decreased. Thus we find that this system can ensure the price stability.

2. Shortage Of Metal :-
If one metal like gold is used as currency by all the world, then the supply would fall short of the currency requirement of the whole world. So this system is the most suitable.

3. Facility For International Trade :-
Bi-metallism facilities international trade because ratio of exchange between gold and silver can be established easily, with all the countries which are on gold or silver standard.

4. Facility For Govt. :-
When there are two metals used as joint standard, the Govt. can easily meet its requirement.

5. Easy For Bank :-
The bi-metallism makes it easy for the banks to keep the necessary cash reserves against liabilities.

6. Depreciated Metal Value Does Not Fall :-
Bimetallism is very helpful in arresting the price of the value of the depreciated metal.

Following are the main defects of this system :

1. Difficulty In Maintaining The Mint Ratio :-
It is very difficult to maintain the mint ratio between gold and silver in the face of over fluctuating market ratio of exchange.

2. Single Country Can Not Adopt It :-
Normally it is not possible to adopt bi-metallism in a single country because the mint ratio and market ratio of exchange can create confusion in the gold bullion market. Sometimes gold currency can be overvalued and some times silver can be over valued. However if the whole world adopts bimetallism and fixes the same ratio of exchange between gold and silver then there are chances of maintaining bimetallic standard.

3. Create Confusion And Uncertainly :-
When there will be instability in the ratio of monetary standard it creates confusion and uncertainty in business transaction. The debtor would like to pay in that standard metal which is under valued, while the creditor will demand in the over valued metal.


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