Economics Dictionary of ArgumentsHome
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| Gresham's Law: Gresham's Law in economics states, "Bad money drives out good money." It means that when two currencies of different value circulate, people tend to hoard the currency with higher intrinsic value (good money) and use the less valuable one (bad money) in transactions, causing good money to disappear from circulation. See also Money, Bimetallism, Gold standard, Central banks._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Gresham’s Law - Dictionary of Arguments
Rothbard III 898 Gresham’s Law/Rothbard: Relative prices: Our analysis of the effects of price control applies also, as Mises has brilliantly shown, to control over the price ("exchange rate") of one money in terms of another.(1) >Price control/Rothbard. This was partially seen in Gresham's Law, one of the first economic laws to be discovered. Few have realized that this law is merely a specific instance of the general consequences of price controls. Perhaps this failure is due to the misleading formulation of Gresham's Law, which is usually phrased: "Bad money drives good money out of circulation." Problem/Rothbard: Taken at its face value, this is a paradox that violates the general rule of the market that the best methods of satisfying consumers tend to win out over the poorer. Coinage: The phrasing has been fallaciously used even by those who generally favor the free market, to justify a State monopoly over the coinage of gold and silver. Actually, Gresham's Law should read: "Money overvalued by the State will drive money undervalued by the State out of circulation." Price control/relative prices: Whenever the State sets an arbitrary value or price on one money in terms of another, it thereby establishes an effective minimum price control on one money and a maximum price control on the other, the "prices" being in terms of each other. >Relative price/Rothbard. Bimetallism: This, for example, was the essence of bimetallism. Under bimetallism, a nation recognized gold and silver as moneys, but set an arbitrary price, or exchange ratio, between them. When this arbitrary price differed, as it was bound to do, from the free-market price (and this became ever more likely as time passed and the free-market price changed, while the government's arbitrary price remained the same), one money became overvalued and the other undervalued by the government. Thus, suppose that a country used gold and silver as moneys, and the government set the ratio between them at 16 ounces of silver : 1 ounce of gold. Rothbard III 899 The market price, perhaps 16:1 at the time of the price control, then changes to 15:1. What is the result? Silver is now being arbitrarily undervalued by the government and gold arbitrarily overvalued. In other words, silver is fixed cheaper than it really is in terms of gold on the market, and gold is forced to be more expensive than it really is in terms of silver. The government has imposed a price maximum on silver and a price minimum on gold, in terms of each other. The same consequences now follow as from any effective price control. With a price maximum on silver, the gold demand for silver in exchange now exceeds the silver demand for gold (conversely, With a price minimum on gold, the silver demand for gold is less than the gold demand for silver). 1. Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Nachdruck durch das Ludwig von Mises Institute, 1998. pp. 432 n., 447, 469, 776._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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