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A. Bimetallism

Government imposes price controls largely in order to divert public attention from governmental inflation to the alleged evils of the free market. As we have seen, "Gresham's Law"—that an artificially overvalued money tends to drive an artificially undervalued money out of circulation—is an example of the general consequences of price control. Government places, in effect, a maximum price on one type of money in terms of the other. Maximum price causes a shortage—disappearance into hoards or exports—of the currency suffering the maximum price (artificially undervalued), and leads it to be replaced in circulation by the overpriced money.

We have seen how this works in the case of new vs. worn coins, one of the earliest examples of Gresham's Law. Changing the meaning of money from weight to mere tale, and standardizing denominations for their own rather than for the public's convenience, the governments called new [64] and worn coins by the same name, even though they were of different weight. As a result, people hoarded or exported the full weight new coins, and passed the worn coins in circulation, with governments hurling maledictions at "speculators," foreigners, or the free market in general, for a condition brought about by the government itself.

A particularly important case of Gresham's Law was the perennial problem of the "standard." We saw that the free market established "parallel standards" of gold and silver, each freely fluctuating in relation to the other in accordance with market supplies and demands. But governments decided they would help out the market by stepping in to "simplify" matters. How much clearer things would be, they felt, if gold and silver were fixed at a definite ratio, say, twenty ounces of silver to one ounce of gold! Then, both moneys could always circulate at a fixed ratio—and, far more importantly, the government could finally rid itself of the burden of treating money by weight instead of by tale. Let us imagine a unit, the "rur," defined by Ruritanians as 1/20 of an ounce of gold. We have seen how vital it is for the government to induce the public to regard the "rur" as an abstract unit of its own right, only loosely connected to gold. What better way of doing this than to fix the gold/silver ratio? Then, "rur" becomes not only 1/20 ounce of gold, but also one ounce of silver. The precise meaning of the word "rur"—a name for gold weight—is now lost, and people begin to think of the "rur" as something tangible in its own right, somehow set by the government, for good and efficient purposes, as equal to certain weights of both gold and silver.

Now we see the importance of abstaining from patriotic [65] or national names for gold ounces or grains. Once such a label replaces the recognized world units of weight, it becomes much easier for governments to manipulate the money unit and give it an apparent life of its own. The fixed gold-silver ration, known as bimetallism, accomplished this task very neatly. It did not, however, fulfill its other job of simplifying the nation's currency. For, once again, Gresham's Law came into prominence. The government usually set the bimetallic ration originally (say, 20/1) at the going rate on the free market. But the market ratio, like all market prices, inevitably changes over time, as supply and demand conditions change. As changes occur, the fixed bimetallic ratio inevitably becomes obsolete. Change makes either Murray N. Rothbard

gold or silver overvalued. Gold then disappears into cash balance, black market, or exports, when silver flows in from abroad and comes out of cash balances to become the only circulating currency in Ruritania. For centuries, all countries struggled with calamitous effects of suddenly alternating metallic currencies. First silver would flow in and gold disappear; then, as the relative market ratios changed, gold would pour in and silver disappear. [8]

Finally, after weary centuries of bimetallic disruption, governments picked one metal as the standard, generally gold. Silver was relegated to "token coin" status, for small denominations, but not at full weight. (The minting of token coins was also monopolized by government, and, since not backed 100% by gold, was a means of expanding the money [66] supply.) The eradication of silver as money certainly injured many people who preferred to use silver for various transactions. There was truth in the war-cry of the bimetallists that a "crime against silver" had been committed; but the crime was really the original imposition of bimetallism in lieu of parallel standards. Bimetallism created an impossibly difficult situation, which the government could either meet by going back to full monetary freedom (parallel standards) or by picking one of the two metals as money (gold or silver standard). Full monetary freedom, after all this time, was considered absurd and quixotic; and so the gold standard was generally adopted.