Jun

3

So I wish to present the argument that various interests and groups, notably including "Keynesian" economists, have sold to the public a "quasi-doctrine" which teaches, in effect, that "less is more" or that (in other words) "bad money is better than good money". Here we can remember the classic ancient economics saying called "Gresham's law" which was "the bad money drives out the good". The saying of Gresham's is mostly of interest here because it illustrates the "old" or "classical" concept of "bad money" and this can be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30s.

"Capitalism is not intelligent, it is not nice, it's not fair, it is not virtuous and not keep promises. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed."

-John Maynard Keynes

Stefan Jovanovich writes: 

Gresham's law only applies when a country has legal tender coinage of different metals. When he was brought in as agent for the Crown in Amsterdam, Gresham had to explain to Warwick (the head of Edward VI's Regency Council) how he and others had made a hash of things by taking more and more silver out of the shilling coins they were minting. As a result, the Crown's credit was lousy; and no one would accept the "new" shillings except at a severe discount. Because Warwick had authorized several successive debasements, no one in their right mind paid their debts using the still unadulterated gold coins of the realm; those people kept in their strong boxes or sent to Amsterdam where they could profit from the arbitrage opportunity. (In England, of course, "the law" required them to accept all coinage at is face legal tender measure.)

None of this applies to the present situation for the simple reason that coin are no longer legal tender anywhere in the world. The only measure of "bad" money that now applies is whether or not someone will swap your legal tender IOUs for some other legal tender IOUs; now it is the bad money that disappears, not from hiding but from the disappearance of the traders willing to hold it even for a millisecond.

The goldistas, like the Jacobites, still keep thinking that the rightful king will return to the thrown, that, because gold once was money, it will be so again. It may; but, if it does, there will be little arbitrage opportunity - just as there was little opportunity when Grant strong-armed Congress into adopting resumption. Gold will become legal tender again only when a government accepts the wisdom of the authors of the American Constitution - i.e. "the law" cannot put a price on money. As I wrote recently, Cantillon's reform for Greece would be similar to what Gresham did in Amsterdam for Edward VI - a combination of absolute default and establishment of a new currency based on a fixed weight and measure. (I should note that Gresham did not solve the secondary problem of bimetallism; when the coins are "honest" and have the amount of precious metal that the law requires, the ratio of the legal tender values will still create the problem of arbitrage. The actual demand for silver and gold bullion will be at variance with the official ratio. Grant also solved that inescapable problem by limiting silver coinage to secondary coins and limiting the amount minted so that there was no opportunity for arbitrage.)

There is, in Gresham's and Grant's sense, no money in the world right now; there are only IOUs that countries have defined as their legal tender.

This does not make a difference to the people who are "in the market". But, to the great majority of people, who have only their small savings of money, it makes an enormous difference. The great thing about "deflation" - the ability of people to make things better, faster and, therefore, cheaper - was that it rewarded thrift and gave folks a return on investment simply from holding their coins and deferring spending. When people "did not trust banks", it was not simply out of ignorance; they knew that their hoards of gold coin would be worth more and more in the future. So, too, would bank deposits; but only if the bank actually paid out in coin. Default was the risk that debasement now is.


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  1. Spekulatn on June 5, 2015 8:43 pm

    http://www.zerohedge.com/news/2015-06-05/simplest-way-describe-keynesianism-one-photo

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