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Observations regarding Mr. Robert Mundell’s Essay
Tuesday, 21 September 2004
Hugo Salinas Price

“It is, perhaps, fitting to close on an extension of Gresham's Law to the theory of money itself. The motivating force underlying Gresham's Law is economy: we settle a debt or transaction with the cheapest means of payment. But that is what money is! In the world of exchange, debts are settled in the cheapest medium possible. In the world of the gold standard, debts are not settled in wheat or oxen or fish, but gold, because gold is the cheapest means of settlement. Gold is the "bad" money that is "driven out" because it has the lowest costs of transport per unit of value. Silver, gold, paper, cheque money, and electronic transfers in succession become the means of settlement--the bad money that is driven out--because they have been increasingly cheaper forms of payment. Thus it is that Gresham's Law can lead to insights into the very heart of monetary theory.”  


Mr. Mundell is equivocating in the last paragraph of his most interesting essay, “The Uses and Abuses of Gresham’s Law in the History Of Money”.

He restates Gresham’s Law as follows: “The motivating force underlying Gresham’s Law is economy: we settle a debt or transaction with the cheapest means of payment.”

If paper, cheque money, and electronic transfers of today referred to transfers of the ownership of gold, as they did up until the world went off gold in the thirties, they would indeed be simply “increasingly cheaper forms of payment”. Such means of settlement of debt or transactions would indeed be progressively more economical and more useful. Mr. James Turk, the inventor of “Goldmoney”, by means of which “goldgrams” are transferred electronically from one party’s ownership  to another’s, is the latest innovator of a cheaper form of transferring payment. All well and good.

However, Mr. Mundell is equivocating because he is lumping together, as means of settlement, two entirely different thngs; as of the early twentieth century, silver and gold became two things completely different and not comparable to “paper, cheque money, and electronic transfers”.

Although at the “micro” level we can legally say that our debt or transaction is “settled” upon execution of paper, cheque money or electronic transfer, at the “macro” level, debts are not “settled” at all. All paper, cheque money and electronic transfer today, is simply the transfer of an underlying debt, as all money in the world, today, is created by a prior creation of debt.

All monetary activity today, is simply a reshuffling of debt; at the interpersonal level, debts and transactions are considered as “settled” by the transfer of paper, cheque money or electronic transfer. However, at the national and international level, there is no actual settlement of debt, because there is no transfer of something of intrinsic worth, as was the case when the ownership of silver and gold - and upon the de-monetization of silver exclusively gold - changed hands, either at the personal level, or at the international level.

“Cheaper” is a comparative term. In what sense can we rationally comprehend that “paper, cheque money and electronic transfers are increasingly cheaper forms of payment”, in comparison with silver and gold, when silver and gold are tangible and have worth in themselves, and paper, cheque money and electronic transfers have reference to nothing at all?

How can we compare two things that have nothing in common? How can the real be compared to the imaginary? How can something with intrinsic value be compared to, or placed in series with things that have no intrinsic value?Are we saying anything at all, when we say that “to tender a nothing is cheaper than to tender a something”?

Up until the thirties, gold was money, and paper and cheque money were money substitutes, which served to transfer title to gold; indeed, they were at that time, cheaper forms of transfer of payment of gold in settlement of debt or transaction. Today, paper, cheque money and electronic transfers are not money substitutes, but something entirely different: fiat  money, that is to day, money with exclusively imaginary value; an imaginary value shared by all the population that uses it, but nevertheless, essentially imaginary, as resting upon a belief: fiduciary money, from Latin fido, “I believe”.

Perhaps it was not Mr. Mundell’s intention, but he does appear to validate or legitimize the changes from silver and gold to paper, cheque money and electronic transfers as merely “increasingly cheaper forms of payment”. It would appear that Mr. Mundell would have us therefore accept paper, cheque money and electronic transfers without qualms as simply cheaper forms of settling debts and paying for transactions.

Placing gold and silver in series with paper, cheque money and electronic transfers as “progressively cheaper forms of payment” is an equivocation, since the series omits the essential difference between gold and silver as true means of payment, and paper, cheque money and electronic means of settlement as only transfers of underlying debt, with a shared imaginary value.

Such an equivocation leads the layman into thinking that the present international monetary  system is merely a logical extension of rational action, and therefore entirely acceptable, when it is nothing of the sort.

Gresham’s Law has effectively driven gold out of circulation, in favor of paper, cheque money and electronic transfers, but not because they are “cheaper forms of payment”, but because they are not true money at all. When governments decree that payment consists in tendering their fraudulent fiat money, then all of us must participate in the fraud whether we know it or not, whether we wish to, or not.

You want cheap? The cheapest form of payment, is to kill the creditor; or barring that, to pay him with something worthless. And today we do that with admirable efficiency and economy of means. Gresham’s Law at work today!