Bimetallism System

Bimetallism System

Bimetallism, a system of currency under which the monetary unit is defined by law in terms of two metals (usually gold and silver) in a specific ratio. Each metal is accepted in unlimited quantity for coin-age, and each coinage is legal tender. The main difficulty of the system is that of maintaining the ratio between the maths in the face of fluctuations in their market price; another is that the undervalued metal would tend to drive the other out of circulation. The system was used in America and on the continent of Europe in the nineteenth century largely because it was thought that dependence on only one metal risked deflation if its supply did not keep pace with growing economic activity. It tended to break down when the values of the two metals in world markets differed because the metal with higher value tended to be exported, leaving the metal with the lower value. When metal was replaced by paper currencies in the twentieth century the need or argument for bimetallism became weak.

Black Market, a free market that forms spontaneously when for-bidden by law. When the maximum price of a commodity, a service or a factor of production is fixed by administrative decree, and buying or selling above the fixed price is outlawed, there will usually be economic pressures that induce people to break the law.

Such a decree on prices is frequently used with rationing in war-time, that is, with the allocation of supplies according to coupons and not money. If the law is broken, the transactions at the illegally high prices form the black market. The economic pressure tending to create a black market comes into being because the price at which supply and demand would be in equilibrium in a free market tends to be above the legal maximum. Therefore if demand exceeds supply at the (low) fixed price, it cannot be wholly satisfied and supplies are allocated either by some form of rationing or on a 'first come, first served' principle or by preferences for known or influential customers. Frustrated buyers thus tend to offer higher prices to obtain supplies in spite of the law. The economic pressure to create a black market may be contained by a sense of common purpose that restrains people from buying and selling at market prices or by strong administrative controls and heavy penalties. The former was effective to some extent in Britain during the Second World War (but much less alter it); the second method is used in state-directed economies such as Russia, China, Poland and others where black (free) markets persist on a large scale in spite of them.

Blocked Balances. See Sterling Balances.

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