I was wondering what would happen if the value of gold increases so much such as any good could be sold at a price which represents less that a molecule of gold. From that point on, supposing that productivity keeps increasing faster than the supply of money, more and more goods will start to be sold at non-gold values (a percentage of a gold molecule). How would people react? Would that allow to establish a double standard?
If it becomes too scarce, then it's value as money would naturally decline among all trading individuals. A new money would replace it. Be it silver or other easily divisible (and relatively stable) commodities.
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If that were to happen, and I don't think it's a practical concern, there would be some crazy gold-mining going on
Selgin has a paper on this, he says that when he was doing research on private minting in England he came across the situation in which there was a shortage of small change. Under a full-reserve system in which there is some precious metal as the base money it is quite possible that the metal in question will be too valuable in that, small change will be tiny or not valuable enough in which case the larger coins will be huge. Now, he notes there's a few ways out of this. Either you use token coins for the smaller amounts, but this leads to problems of forgery. Or you use two different metals, at which point greshams law kicks in.
OTOH, FRB solves this.
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GilesStratton:Or you use two different metals, at which point greshams law kicks in.
Hi Giles,
Doesn't Gresham's Law only kick in when an artificial fixed exchange ratio is imposed regarding the two metals?
I know, I've already posted something about Selgin's paper (http://mises.org/Community/forums/t/9618.aspx). I still don't find that much convincing, just as I think that FRB wouldn't be successful in practice. :(
Lilburne, yes, it does. But if you imagine a banking system in which both gold and silver are used as media of exchange coins made up of these metals would presumably trade at their face value. Now, this is akin to an artificial exchange ratio.
GS:Selgin has a paper on this, he says that when he was doing research on private minting in England he came across the situation in which there was a shortage of small change.
Under a full-reserve system in which there is some precious metal as the base money it is quite possible that the metal in question will be too valuable in that,
small change will be tiny or not valuable enough in which case the larger coins will be huge.
Now, he notes there's a few ways out of this.
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GS:But if you imagine a banking system in which both gold and silver are used as media of exchange coins made up of these metals would presumably trade at their face value. Now, this is akin to an artificial exchange ratio.
Giles, if the face values represented "a certain weight of gold" vs. "a certain weight of silver", wouldn't those face values represent different denominations? As long as the exchange ratio between a given weight of gold and the same weight of silver was allowed to fluctuate in the market, there would be no overvalued money to drive out undervalued money (Gresham's Law in action), because all money units would be valued appropriately. Outside of being forced to by law, people wouldn't value one "dollar" of gold the same as one "dollar" of silver, just because they bear the same name, unless the values of the two amounts of metal were actually the same on the market.
Lilburne: Doesn't Gresham's Law only kick in when an artificial fixed exchange ratio is imposed regarding the two metals?
That's how I've always understood it.
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David Z
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Lilburne, no matter if that is the case, if they exist two different media of exchange there will have to be some sort of exchange rate between them. Whether it be shops quoting their prices in one metal and offering some sort of exchange rate for the other (i.e. the LvMI sells books in gold and says you can pay in silver at a certain exchange rate). Perhaps this might not be a strict case of Greshams law (although, I believe it is) it certainly has affinities.
Perhaps the bigger, but related, problem is that of the unit of account. Presumably only one of the metals could serve as the unit of account, but in this case there would almost certainly have to be some sort of exchange rate that corporations use. In which case all the usual problems follow. Now, I don't think the seriousness of this problem can be decided a priori so I don't think I can comment. I know Selgin has and I'll give his piece a more thorough reading and get back to you.
GilesStratton:Lilburne, no matter if that is the case, if they exist two different media of exchange there will have to be some sort of exchange rate between them. Whether it be shops quoting their prices in one metal and offering some sort of exchange rate for the other (i.e. the LvMI sells books in gold and says you can pay in silver at a certain exchange rate). Perhaps this might not be a strict case of Greshams law (although, I believe it is) it certainly has affinities.
no, as lilburne and david said, greshams law is only relevent when the exchange ratio is artificially fixed.
GilesStratton: but in this case there would almost certainly have to be some sort of exchange rate that corporations use. In which case all the usual problems follow.
free floating exchange rates cause problems? like the fact that the exchnage rate between apples and pears on the market is free floating ?
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nirgrahamUK:free floating exchange rates cause problems? like the fact that the exchnage rate between apples and pears on the market is free floating ?
As Lilburne has pointed out, money is on one side of every exchange, this is where the problem comes in. Look no matter what if there are to different media of exchange there has to be some sort of "artificial" exchange rate between the two.