Wednesday, February 6, 2013

Somebody needs to go down to Richmond and teach my elected representatives about Gresham's Law

A Virginia representative is proposing a state currency - Constitutional by virtue of the fact that it will be gold or silver (HT - Kate).

He is afraid of the Fed devaluing the dollar. Hmmm...

Pre-1982 pennies aren't around all that much because of the copper content. How the hell do they expect gold and silver coins to solve this problem.

Let's take this up for debate again when we get hyperinflation. Then, sometimes, Gresham's Law breaks down.

Of course there was terrible economics about the Fed destroying the dollar in there too - but that looks tame compared to some of the other problems with this.


  1. That article doesn't seem very good itself: "A single currency is one of the bedrock assumptions of modern economics." I'm pretty sure that's not true even though it's a very common assumption. Are there really that many models out there that give significantly different results depending upon how many currencies are in play?

    1. I missed that line.

      Ya - I would have thought the opposite! You miss a lot when you ignore open economy effects which almost by definition mean multiple currencies. Any primacy given to a single national currency is surely just a function of our own experience.

    2. I would argue we have a single national currency as a unit of account, but not medium of exchange. People trade using bank deposits and credit all the time. A little more radical, the Bank of Scotland most notably (but some other banks also) issue their own notes which generally trade at par with the Bank of England notes, but are genuinely different. Most importantly perhaps, Bank of Scotland notes are not legal tender anywhere. Sure, it's not the same as currencies that float against each other, but if Selgin is to be believed on the history of competitive currency issue, most multi-currency systems stabilize with the different notes trading at par with each other. (Mostly because it's too much of a pain to keep running exchange rate calculations I would venture)

    3. Re: "notes trading at par with each other." I believe the explanation is that Scottish Free Banks, which engaged in "note dueling" initially (trying to surprise each other with massive surprise redemptions of notes into gold), eventually figured out that acceptance of each others' notes would increase their note circulations vis-a-vis competing banks that did not accept rival notes. Eventually, game theory led all banks to join the consortium of banks engaging in mutual par acceptance. (From White's Theory of Monetary Institutions, I believe. Don't have it with me).

      Dan, I wouldn't worry about this. The IRS considers gold coins to be "collectibles" and thus subject to cap gains tax ("bartering appreciated assets"). The filing headaches alone (let along paying extra tax) should discourage anyone from transacting in gold coins.,,id=187904,00.html

      Is this just? Well, Ron Paul tried to eliminate the cap gains and sales tax barriers to using precious metals as money with his Free Competition in Currency Act. (reintroduced in 2013).

      Anyway, what is the harm in allowing people to transact in gold and silver? It's not like there's any threat of more than 0.0000000001% of people ever ceasing to transact in dollars.

    4. @John S:

      There are a whole bunch of reasons why the free-bank notes ended up trading at par. Rival banks accepted each other's notes partially in order to conduct note-raids where they tried to bankrupt each other. But the Scottish Free Banking system isn't what I was talking about. Nowadays, there are only a few banks in the UK which are allowed to issue their own notes.

      I don't think anyone here thinks there is anything wrong with letting people trade in gold and silver. But the proposal is supposed to be a "sound money" response to the Fed's supposed rampant use of the printing press. Of course, if this is true, Gresham's law applies: Bad money drives out good. So the gold and silver coins would have no chance of competing with the Federal Reserve Notes. So the idea isn't likely to have a bad effect as much as it's unlikely to have any effect, especially if you make the assumptions that its proponents make.

    5. Oh I'm not worried about it hurting anything... just a little astounded by it all.

    6. "Gresham's law applies: Bad money drives out good."

      Wouldn't this only apply if the face value (in dollars) were lower than the value of the gold/silver content? In theory, if the coins were denominated in grams (instead of the current market value in dollars), why would the coins go out of circulation? "Bad money drives out good if their exchange rate is set by law." (wiki)

      Alternatively, the face value of the coins could be set at a level higher than the mkt val of the metal content, allowing the coins to circulate as redeemable tokens (fiduciary media). But in that case, it would just be more cost effective to use redeemable paper notes (like Canada until 1935). This would probably be illegal, as Bernard Von Nothaus discovered, although imo it shouldn't be.

      I'm reading Selgin's Good Money, so this stuff is pretty interesting to me.

      Daniel, may I ask: Do you believe Nothaus is a criminal?

  2. I can't believe that Bernard Lietaer is quoted in the article. He was one of my early mentors.


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