Artificial Fixing of the Exchange Rates between Gold and Silver Creates a Shortage of the Artificially Undervalued Money and a Surplus of the Overvalued Money

Bimetallism, the system of legislative fixing of the exchange rate between gold and silver, has been generally regarded as a form of price control, and therefore undesirable from a free market point of view. Brough blames this “artificial obstruction” in bimetallism on the government for the creation of Gresham’s Law, which states that “bad money drives out good.” Gresham’s Law would not occur on the free market, according to Brough: “The more efficient money will always drive from circulation the less efficient if the individuals who handle money are left free to act in their own interest. It is only when bad money is endorsed by the State with the property of legal tender that it can drive good money from circulation.” Later, writers such as Ludwig von Mises show that Gresham’s Law is caused by government intervention rather than a characteristic of the free market. The government’s artificial fixing of the exchange rates between gold and silver creates a shortage of the artificially undervalued money (“good money”) and a surplus of the overvalued money (“bad money”).

--Mark Skousen, introduction to Economics of a Pure Gold Standard, 4th ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 2010), Kindle e-book.