Publications
Partners
As debt crises grip the European Union’s less disciplined, more romantic and more spendthrift member nations and the mighty United States faces default, it’s perhaps timely to revisit Gresham’s Law, which says bad money will always drive out good money. Sir Thomas Gresham (1519-1579), an English financier during the Tudor period and adviser to Elizabeth I, put forward the suggestion that as sensible people would want to retain “good” money they’d keep it and use “bad” money for purchases and the settlement of debt.
In those times money was considered “good” or “bad” according to the precious metal content of the coins being used. As face value (determined by the issuing authority) didn’t change as precious metal content fell it was clearly logical to try to keep good coins and pass on the bad. Thus bad money drove good money out of circulation.
As recently as the Seventies, the US Federal Reserve Bank undertook on each of the currency notes it issued to redeem those dollars in gold bullion at an exchange rate of US$35/oz. In August 1971, as a reporter covering the annual meetings of the International Monetary Fund and the World Bank in Washington, your ancient scribe witnessed then US President Richard Nixon announce to the world he was closing the gold window established by the Allies at the end of the Second World War.
As presidential biographer Stephen Ambrose notes in the second volume of his great trilogy about Nixon: “…the US had agreed to establish the dollar as the standard against which all other currencies would be matched by buying gold at $35 an ounce (and) the fixed prices had made the dollar as ‘good as gold’.” Nixon said he’d decided “…to suspend temporarily the convertibility of the dollar into gold”. That “temporarily” became permanent and we need 50 times as many US dollars to acquire an ounce of gold.
Money as a means of exchange and a store of value has a history of many thousands of years. Fiat money – that is, currency backed by the promises and reputation of its issuer rather than something tangible – has been an essential element in the growth of the modern world economy. Without fiat money, which currently largely exists only as electronic signals and bytes, the development of modern society wouldn’t have been possible. Consider the billions and trillions of transactions that take place every second of every minute worldwide financing the movement of vast quantities of goods and settling accounts for myriad kinds of services.
To try to employ what’s known as commodity money – or by gold bugs as “honest” money – to facilitate world economic activity of the modern scale would be a chimera. That would be to return to a system of barter that’s by its nature slow, cumbersome, awkward and limited. It also requires a coincidence of wants. Barter does go on, of course. Landowners in Europe are often paid by tenant farmers in kind, such as wine, or olives or a regular supply of food. That excludes not only fiat money but also the tax collector.
Sadly – as with the rest of mankind – politicians are imperfect and often rash and stupid so that society is regularly shaken by monetary crises. Those have been made worse in the Eurozone by the foolish and futile plan for nations as diverse in their culture as Greece and Germany to share a common currency. One of the outcomes of the euro is that the market’s self-correcting mechanism isn’t allowed to work.
If Greece still had the drachma and misbehaved fiscally, as it has done, then the drachma would have lost at least 50% of its value. Tourists would have flooded in, along with buyers of Greek assets at knockdown prices. Then the Greeks would have tightened up, the drachma would have recovered and some other country would misbehave. What the euro has done has been to shield errant nations from the disciplines of the market so that they engaged, without currency weakness, in their worst fiscal habits.
In those times money was considered “good” or “bad” according to the precious metal content of the coins being used. As face value (determined by the issuing authority) didn’t change as precious metal content fell it was clearly logical to try to keep good coins and pass on the bad. Thus bad money drove good money out of circulation.
As recently as the Seventies, the US Federal Reserve Bank undertook on each of the currency notes it issued to redeem those dollars in gold bullion at an exchange rate of US$35/oz. In August 1971, as a reporter covering the annual meetings of the International Monetary Fund and the World Bank in Washington, your ancient scribe witnessed then US President Richard Nixon announce to the world he was closing the gold window established by the Allies at the end of the Second World War.
As presidential biographer Stephen Ambrose notes in the second volume of his great trilogy about Nixon: “…the US had agreed to establish the dollar as the standard against which all other currencies would be matched by buying gold at $35 an ounce (and) the fixed prices had made the dollar as ‘good as gold’.” Nixon said he’d decided “…to suspend temporarily the convertibility of the dollar into gold”. That “temporarily” became permanent and we need 50 times as many US dollars to acquire an ounce of gold.
Money as a means of exchange and a store of value has a history of many thousands of years. Fiat money – that is, currency backed by the promises and reputation of its issuer rather than something tangible – has been an essential element in the growth of the modern world economy. Without fiat money, which currently largely exists only as electronic signals and bytes, the development of modern society wouldn’t have been possible. Consider the billions and trillions of transactions that take place every second of every minute worldwide financing the movement of vast quantities of goods and settling accounts for myriad kinds of services.
To try to employ what’s known as commodity money – or by gold bugs as “honest” money – to facilitate world economic activity of the modern scale would be a chimera. That would be to return to a system of barter that’s by its nature slow, cumbersome, awkward and limited. It also requires a coincidence of wants. Barter does go on, of course. Landowners in Europe are often paid by tenant farmers in kind, such as wine, or olives or a regular supply of food. That excludes not only fiat money but also the tax collector.
Sadly – as with the rest of mankind – politicians are imperfect and often rash and stupid so that society is regularly shaken by monetary crises. Those have been made worse in the Eurozone by the foolish and futile plan for nations as diverse in their culture as Greece and Germany to share a common currency. One of the outcomes of the euro is that the market’s self-correcting mechanism isn’t allowed to work.
If Greece still had the drachma and misbehaved fiscally, as it has done, then the drachma would have lost at least 50% of its value. Tourists would have flooded in, along with buyers of Greek assets at knockdown prices. Then the Greeks would have tightened up, the drachma would have recovered and some other country would misbehave. What the euro has done has been to shield errant nations from the disciplines of the market so that they engaged, without currency weakness, in their worst fiscal habits.
