Bad Money Drives Out Good
Economists call this Gresham’s Law. Historically, when a country’s money was theoretically a precious metal, and it tried to debase its coinage (such as mixing the silver with lead), people knew what was up. If the debased coins would buy just as much, but had less intrinsic value, they would spend those instead of the coins that contained more silver, the same way people don’t spend collectable coins or mail letters with collectable stamps, when there are more common ones with the same face value.
Similarly, when countries tried to peg their currency to two precious metals at once, like when the United States tried to peg the dollar to both gold and silver until 1853, what happened was that one dollar’s worth of gold was worth a little more than one dollar’s worth of silver on the market, or vice versa, but the US government would trade you gold for your silver at a loss, with the taxpayer’s money. So people did that, and only silver would circulate as currency while gold was exported or melted down.
All countries that tried bimetallism first abandoned either the gold or the silver standard in practice, then made that official, then abandoned the other. Today, countries either peg their currencies to a bigger currency that they do most of their international trade in, or to nothing at all.
There were sincere arguments at the end of the 1800s for bimetallism, but modern economists would not find any of them convincing today. The people who supported that policy weren’t stupid, but they had different goals, assumptions and examples in mind than we do.
Supply Shocks Happen
A separate but related problem is that sometimes someone discovers a new gold mine, or a treasure fleet carrying silver from another continent sinks. Both of these things would put the supply and demand of gold and silver out of whack, and would normally lead to the same amount of gold being able to buy less silver. In fact, the only thing that could prevent that from happening is if someone bought the right amount of gold or sold the right amount of silver to maintain the exchange rate.
But What Could Make it Work?
That’s what you really wanted to know. Here are some ideas that might help, only some of which involve magic:
You know all those dragons or gnomes or what-have-you with their giant hoards of gold and silver? Whenever the market value of gold drops below sixteen times the market value of silver, they think that gold is a bargain, and sell some of their silver to buy gold. They don’t release all their gold coins into circulation, causing a vicious cycle where gold gets even less valuable, making even more people want to spend it instead of their silver, because so much of the gold and silver is in the hands of people who hoard it and speculate on it, rather than spend it.
Maybe they used divinations to foresee what the future exchange rate of gold and silver would be, then bought whichever metal was currently cheaper than that, so it become a self-fulfilling prophecy.
It’s a Drop in the Bucket
Piddly little things like gold rushes and dragonslayings don’t have much effect on the market price, because the real markets are underground, where the Dwarves, Gnomes and Kobolds trade all the gold and silver they’ve mined over the centuries. If there’s some local fluctuation that makes your silver able to buy more gold than it could in the Hall of the Mountain King, some enterprising arbitrageur trades silver for gold, takes the gold up to the Gnomes, and trades it for more silver than they started with. The Gnomes don’t want to, or are unable to, or are not allowed to, buy things from the surface with all that gold and silver. So they don’t export their precious metals and they don’t cause inflation on the surface. The Gnomes have so much gold and silver relative to the surface that nothing that happens up there makes much of a dent in their stocks.
Magic Gives the Currency a Natural Value
If there are spells that create gold and silver, or spells that consume gold and silver, then that might establish their relative supply and demand. Perhaps gold is sixteen times more expensive than the same weight of silver because alchemists can create sixteen times as much silver for the same investment, or maybe silver is more valuable because it kills certain monsters.
The Price is Fixed By Law
The Great Pact of ancient times bound the Gnomes to buy from and sell to us at the same price in gold and silver, forever. If there were ever a surplus of gold and a shortage of silver in the land, we would choose to pay the Gnomes in gold and ask for silver.
Why Would it Have Changed?
That’s how it’s always been. A piece of gold has always been that size and always been worth sixteen pieces of silver. Everybody knows that. I guess people sometimes try to cheat and take advantage of the simple folk, but not enough to make a difference, thank the gods. Maybe it’s because gold is more rare, and always will be. Change the prices? Are you mad?
Someone is Manipulating the Currency
Okay, you got me, this wouldn’t really happen unless somebody were actively working to maintain the exchange rate of one gold piece to sixteen silver pieces. But who? And why? Maybe there’s one culture that uses gold for money, another that uses silver, and someone’s manipulating the economy to keep the exchange rate from rising or falling—think China or Norway.