Understanding Gresham's Law" by Reagan Renaissance 04/03/2006

UNDERSTANDING GRESHAM'S LAW
by Reagan Renaissance
April 3, 2006

The course our city runs is the same towards men and money.
She has true and worthy sons.
She has fine new gold and ancient silver,
coins untouched with alloys, gold or silver,
each well minted, tested each and ringing clear.
Yet we never use them!
The Frogs by Aristophanes 405 BC

According to University of GA economist George Selgin, "The expression "Gresham's Law" dates back only to 1858, when British economist Henry Dunning Macleod (1858, p. 476-8) decided to name the tendency for bad money to drive good money out of circulation after Sir Thomas Gresham (1519-1579). However, references to such a tendency, sometimes accompanied by discussion of conditions promoting it, occur in various medieval writings, most notably Nicholas Oresme's (c. 1357) Treatise on money, and can even be found in much earlier works, including Aristophanes' The Frogs, where the prevalence of bad politicians is attributed to forces similar to those favoring bad money over good."

There are three reasons why the mistakes of the past are repeated. We fail to learn the facts of the past, we fail to understand the significance of the facts we have learned, or we believe that "It's different this time." Most economists or political dissidents believe the solution to the dilemma posed by Gresham's Law is to change the money. Patrons of Financial Sense Online should be familiar with the debates between Nelson Hultberg, Antal Fekete, Sean Corrigan, Robert Blumen and familiar with articles by Bill Bonner, Addison Wiggins, Lew Rockwell and other contributors from Mises.org discussed or linked at Financial Sense. Market participants and analysts believe markets are patterned whether driven by emotions or by herding instincts. Are these scholars missing a common thread that fouls both money and markets? Did Aristophanes recognize that the problem is not the money or the markets, but was in fact the law? If the problem is the law, the solution is to change the lawmakers.

In the absence of term limits, not only do incumbents have an advantage over challengers, but also career oriented politicians have a campaign financing competitive advantage over principled opponents. Politicians committed to staying in office or a party committed to staying in power will invariably resort to using the treasury to buy the votes of their constituents. This is the fundamental element that forms the foundation of socialism. Over time socialism gradually undermines any humane benefits that occur on a short term basis. In the end, through its erosion of the incentive to self-improvement and the erosion of the incentive to be productive together with its displacement and corruption of genuine enlightened charity, socialism ends up doing the most harm to the very people it was intended to help.

Once socialism is introduced into an economy, capital formation is inhibited and capital will be consumed. It is the combination of limited capital formation coupled with the destruction of capital that makes deficit financing necessary. Career politicians with a continuing need for socialism and faced with an expanding debt burden invariably yield to the temptation of corrupting the currency. As a result, socialism becomes the economic equivalent of cancer and career-seeking politicians are the only cause and the sole means of spread. It can be argued in the final analysis that career-minded politicians drive out statesmen and discourage good men from seeking office or unfairly limit their opportunities of winning public office.

It is Gresham's Law of Politicians that leads to ever widening and deepening economic poverty because socialism destroys capital thereby creating the necessity for governments to resort to deficit financing and currency debasement. Gresham's Law of Money is actually the observed effect of the more basic principle of Gresham's Law of Politicians. In the end, this is why all democracies murder themselves ultimately ending in either bankruptcy or hyperinflation. Even the hopelessly naive should be able to see that this is the inevitable fate of the United States unless socialism is abandoned and the Constitution restored. If freedom is to be preserved and the American republic saved, it is going to require the election of statesmen exactly analogous to Ronald Reagan and the Founders.

The father of real economics, Ludwig Von Mises warned:

"Capitalism has raised the standard of life among the masses to a level which our ancestors could not have imagined. Interventionism and efforts to introduce Socialism have been working now for some decades to shatter the foundations of the world economic system. We stand on the brink of a precipice which threatens to engulf our civilization. Whether civilized humanity will perish forever or whether the catastrophe will be averted at the eleventh hour...is a question which concerns the generation destined to act in the coming decades, for it is the ideas behind their actions that will decide it."
"To the masses the catchwords of Socialism sound enticing and the people impetuously desire Socialism...And so they will continue to work for Socialism, helping thereby to bring about the inevitable decline of the civilization which the nations of the West have taken thousands of years to build up. And so we must inevitably drift on to chaos and misery, the darkness of barbarism and annihilation."
"Our whole civilization rests on the fact that men have always succeeded in beating off the attack of the re-distributors. But the idea of re-distribution enjoys great popularity still, even in industrial countries. If we wish to save the world from barbarism we have to conquer Socialism..."

The most successful political dissident of modern times, Ronald Reagan warned, "We have come to a time for choosing; we will preserve for our children this the last best hope for man on earth, or we will sentence them to take the last step into a thousand years of darkness.....history will record with the greatest astonishment that those who had the most to lose did the least to prevent its happening."

The Gokhale-Smetters projections (the $45 Trillion excess projected payments for Social Security and Medicare required by present law over the amount of projected revenue from taxes) confirm the warnings of Von Mises and President Reagan. Gokhale and Smetters also tell us that we have six elections before Medicare becomes an unfolding catastrophe. Socialism can be ended and this disaster averted, but there is no more time for market participants, market analysts, political dissidents and economists to continue to pontificate about their own pet theories when a real solution already exists.

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