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Is Gresham's law a silly mistake or an example of deliberate juggling with facts and concepts? Part II – The Rouble law
If you sincerely believe that money and currencies represent the very same phenomenon, think over this phrase: «Digital water». Or this one: «Paper water». Try to imagine digital or paper water. What do you think, can water be digital or paper? No, it can`t. Only guarantees and promises of water can be digital or paper, not water itself.
You can substitute the word «water» with any other one. It will help you imagine eating paper or digital chocolate. Or drinking paper or digital beer. Or using paper or digital oil for gasoline production. Or connecting your house to a paper or digital electricity supply network.
The situation concerning money is exactly the same. There can be no digital or paper money. The phrases «paper money» and «digital money» actually are just other attempts of juggling with concepts for some evil purpose. Only promises and guarantees of money – currencies and money receipts can be digital and paper, but not the money itself. Nowadays only gold can be considered as money, just like 300 years ago, and its value can only be determined by the weight of this precious metal. Everything else only represents the promises of money, given by somebody on paper or as a digital code.
While continuing the discussion of of Gresham's law's inaccuracy (it started in part one), we should point it out, that money can`t have any monetary value, check item 3. Monetary value is only peculiar to currencies, while according to item 6, money can only have relative value. Therefore, the «value» of any object (including money) can only be determined by the market, not by somebody`s decree. Furthermore, the market value of money, representing a piece of gold with a fixed weight, cannot merely be expressed in all kinds of currencies, but also in all kinds of goods. For example, in oil. However the value of money, expressed in currencies and commodities, de facto is «reverse exchange rate», because in real market economies people mostly use the so-called «direct exchange rate», i.e. the value of all other goods and services, expressed in money. Here is the example of direct exchange: at the moment the price of 1 USD is equal to the price of 0,025 grams of gold. That is, by the current moment the price of 1000 USD is equal to 25 grams or 0.8 ounces of gold, if this measurement system is more convenient for you.
Please, pay attention to the fact, that within the inter-bank system called SWIFT gold is considered a currency with its own code - «XAU». It is reflected in the confirmed ISO 4217 list, that also contains the codes of such currencies as the US Dollars (the code is USD) and Euros (the code is EUR) etc. But it should be pointed out, that although gold is an international currency, in the ISO 4217 list it has no currency denomination. Therefore, the value of gold, the only true international currency is not determined by somebody`s decree and expressed in some national currency. The value of gold is only determined by the purity and weight of the precious metal itself as it is a universal commodity, also known as money.
Is it true, that gold can be considered money and a currency at the same time? Yes, it is, because a currency represents the guarantees of money. Gold as a currency guarantees itself in the form of a liability that has already been met. Therefore, gold is both money and a currency, while its value is only determined by the purity and weight of this precious metal.
Is it true that gold is just a commodity, not a currency? No it isn`t, because people who support this statement contradict the SWIFT system they`re advocating. Within the SWIFT system gold is registered as a currency.
The statement that gold is just a commodity, not money, can only be true if you supplement it with a complementary, but still essential word: «universal». It makes this statement quite absurd: gold is not money, it`s just a universal commodity, that is… money! If you drop the word «universal», the adepts of Church of Dollar who support the abovementioned statement will try to imagine gold to be a common commodity, just like all those goods that are not stored in all the world`s banks as money holding.
Now, when we`ve successfully disproved the common formulation of Gresham's law with the help of history and logic, let`s develop a proper formulation in terms of logic and economy.
So, the correct formulation of Gresham's/Copernicus law should sound like this: «Bad currencies drive out good ones».
Then we will take the liberty of correcting Gresham and Copernicus and drop such non-economic terms as «bad – the worst» and «good – the best». We will substitute them with economic definitions that describe the phenomena, mentioned in Gresham's law, in the most precise way. This is what the law will sound like after all the corrections: «The less valuable currencies drive out the more valuable ones (from a marketing point of view)». Let`s also take proper account of Robert Mandell`s crucial clarification: «The less valuable currencies drive out the more valuable ones (from a marketing point of view) if they share the same price».
Finally, let`s correct Mandell a little in order to sum our conclusions up and get the most accurate formulation of this economic law: «The less valuable currencies drive out the more valuable ones (from a marketing point of view) if they share the same currency denomination».
Why did we use the term «currency denomination» instead of «monetary value»? Because the currencies that are not backed by gold (money) have no relation to money (gold) at all. Therefore, such currencies can`t have any monetary value. A currency can only have monetary value if it is backed by gold, i.e. if it can be exchanged for gold securely. The currencies, that are not backed up by gold, can only have currency denomination, not monetary value. It`s not that easy to point out the differences between the terms «currency denomination» and «monetary value». We should consider this problem by itself and in more details, so we`ll need to arm ourselves with patience.
So, let`s define the concepts of monetary value and currency denomination in economic terms.
The monetary value of a currency represents the ability of this currency to be exchanged for a fixed amount of gold securely and anytime.
The currency denomination represents the ability of some currency to be exchanged for an invariable bundle of commodities (goods and services), in accordance to the value of this commodities, securely and anytime.
Hence it appears that when we speak about monetary value, this term stands for the ability of the currency with a specified denomination to be exchanged for a fixed and invariable sum of money securely. That is, we speak about a currency that is valuable enough to be exchanged for a specific amount of gold. This fact proposes that you are able to exchange this currency for a fixed amount of gold today or in 5, 10, 20 years etc.
However when we speak about currency denomination, we point to quite a different thing: the ability of a currency with a specified denomination to be exchanged for a fixed bundle of commodities. That is, we speak about a currency that is valuable enough to be exchanged for a certain amount of commodities. It proposes that you are able to exchange this currency for a specific bundle of commodities (goods and services) today, in 50, 10,20 years etc.
Therefore, only the currencies that are not backed by gold can have a denomination. I.e., it is the distinctive feature of currencies that are backed by other goods and services in a certain time-constant proportion of value instead of gold (a universal commodity).
Let us formulate this feature.
Currency denomination represents the temporal conformity between the two following components:
1. The time-constant face value of the currency itself, determined by somebody`s decree;
2. The time-constant VALUE of this currency against a fixed and invariable bundle of goods and services.
Consequently, modern currencies have neither monetary value, nor denomination as they lack the second component of currency denomination. The VALUE of currencies against commodities hasn`t been stationary since 1978. It means that currencies with specific face values, determined by somebody`s decrees, are not valuable enough to be exchanged for a time-constant bundle of commodities (goods and services). That is, currencies have lost their denomination. Nowadays currencies lack both monetary value and denomination. After 1978 all the world`s currencies lost all the defining features of time-constant value mediums. They`ve only retained one feature of the old currencies – the face value, determined by decrees.
The year 1978 marked the abolishment of such term as «the currency denomination» itself. This process took place gradually from 1971 to 1978.
First in 1971 the US government dropped the obligations, assumed during the Bretton Woods Conference, refusing to back Dollars with money – a fixed amount of gold. Jamaican currency system, enforced by the USA, was legally confirmed 7 years later, in 1978. Since then the value of all the world`s currencies against bundles of commodities has been vanishing in the course of time. That is why all the modern currencies can`t be used as time-constant measures of value or tools for capital accumulation. Let us point it out: you can`t use something as a measure of value or a tool for capital accumulation, if it tents to zero in the course of time.
Money (gold) receipts are direct predecessors of currencies. Thus, a currency doesn`t only represent a promise of money. It is essential to understand, that a currency is a promise of a fixed and time-constant sum of money.
Please, pay attention: a currency is a promise of a fixed and time-constant sum of money, while a pseudo-currency surrogate is a promise of an indefinite sum of money or a bundle of commodities, that tents to zero in the course of time.
The promise of commodities that can be exchanged for money might serve in a rude fashion for a currency. However nowadays there are no currencies that can be considered as promises of a time-constant sum of money or bundle of commodities. We use some twisted pseudo-currency surrogates and the Dollars, released by the Federal Reserve System, hold the leading position. If we consider the value of the world`s pseudo-currency surrogates in the course of time, we will find out, that its value against bundles of commodities and services vanishes steadily. Therefore, these surrogates can`t be considered promises of money or commodities, measures of value or tools for capital accumulation. The modern surrogates have only inherited one feature of real currencies – their face value, determined by decrees. In this connection it is quite right to say that such pseudo-currency surrogates as the US Dollars rather have currency infamy instead of value.
As a matter of fact, Jamaican currency system abolished the concept of a currency as a promise of a stationary amount of money or commodities. Nowadays the things we call currencies have little to do with them.
In order to hide the substitution of currencies with pseudo-currency surrogates from the general public, the term «floating exchange rates» has been introduced. In fact it should sound like «drowning exchange rates of currency surrogates», as their exchange rates only float relative to each other and their value against real bundles of commodities and services decreases steadily (or drowns). It generates a constant worldwide growth of these pseudo-currency surrogates and it outstrips the accretion of real commodities. Sadly, it`s a marked trend. The devaluation of pseudo-currency surrogates is called «inflation». It is widely suggested, that inflation is a good thing as it is supposed to stimulate economic growth. But it`s a lie, because while the value of pseudo-currency surrogates tents to zero, standards of living and welfare of the world`s population also tent to zero. It undermines the customer demand, the basis for economy in general and business in particular.
We`ve already used the expression «the so-called Jamaican currency system». It`s not a strange coincidence, because in fact Jamaican currency system abolished all the world`s currencies as promises of time-constant amounts of money and commodities. Let`s think it over: the mass media insists that we should call it a currency system, while in fact Jamaican currency system paved the way for the substitution of the world`s currencies with pseudo-currency surrogates. Noneofthesesurrogatescanbeconsideredcurrencies. So the most logically correct and accurate name of this system should sound like this: Jamaican anti-currency system.
We`ve successfully hunted down the questions concerning the terminology and juggling with facts and concepts. It means that now we can introduce a new economic law instead of the essentially wrong interpretation that has been used by many respected economists.
Let us remember the process that involves the gradual substitution of bad types of money (small rocks with apertures, sea shells) with increasingly good ones (it has already been mentioned in the first part of this article). As a result, the humankind switched to gold, the best kind of money in market terms. Pieces of gold with a fixed weight as good money have driven out all the inferior types of money step by step.
Now we can introduce a new law, concerning money, not currencies.
Let`s call it the Rouble law and formulate it like this: «Good money drives out bad money».
Let`s drop the non-economic terms just like we did before and substitute them with economic phenomena, that reflect the meaning of this law in the most accurate way. As a result we will get the final formulation of the Rouble law:
«The money enjoying a higher demand on the market always drives out the money that is in little demand, no matter how high its relative value is».
Who do we call it the Rouble law? Because the word «Rouble» originates from the Russian verb «to chop» (rus. «рубить»). In ancient Russia pieces of gold and silver with a fixed weight, chopped from bars, were considered money and they were called Roubles. They lacked both monetary value and currency denomination. Roubles represented just pieces of precious metal with a fixed weight.
When Roubles contained no denomination (monetary value) determined by decrees the Rouble law operated without a hitch. The value of Roubles was determined in accordance with the weight of precious metals and this type of money was truly good, therefore Roubles drove out all the inferior types of money. However as soon as the Russians started minting Roubles and label their face value, determined by somebody`s decrees, they turned into a currency instead of money, subject to Gresham's/Copernicus law, concerning currencies. We`ve just edited the formulation of this law and brought it in logical correspondence with historical and economic reality.
Thus, the word «Rouble» is very suitable for this economic law, concerning money instead of currencies.
Let`s draw a conclusion: Gresham's law is only correct if it deals with currencies, however, speaking about money, it is essentially wrong. However the antipode law concerning money (the Rouble law) is quite true and accurate.
The Rouble law we`ve just introduced has another hardly noticeable, but essential property, that is very actual nowadays. We will formulate and discuss it later.
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