Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market valued silver a bit lower than that.
So people were happy to bring their silver to the U. S. Mint to be coined. Silver had a higher value as a coin than it did in the market, and it was the opposite for gold. Gresham’s Law teaches us that if two monies must be treated by law as the same value, then the one of lower value will circulate and the one of higher value will be hoarded. This put the fledging America on a de facto silver standard.
Or, bad ideas have their roots in historical precedent but something is lost (or sabotaged) along the way. Back in 1792, there was no question that money meant gold and silver. There was no question that, when you deposited money at a bank, you had a right to get the same amount of money back. However, if each bank had a different unit of deposit, it would be hard to understand if someone said ‘I will pay you ten dollars’. Is that ten Road Runner Bank Dollars or ten Bank of Wile Coyote dollars?
The Coinage Act standardized the unit, but it did not change the rights of depositors or the obligations of banks. However, today, many people think that the government can, post hoc, change the definition of a unit and thereby change the value of everyone’s debt obligations and bank balances (and presumably cause a repricing of every extant asset).
This post was published at GoldSeek on Monday, 21 August 2017.
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