Gresham's law in reverse

Today's article from financeandeconomics.org is well worth a read because it describes how Gresham's law will eventually begin working in reverse.

Gresham's law states that in an economy "bad" money will chase out "good" money IFF their exchange rate is set by law.  In this context, bad money should really be thought of as impaired money while good money is unimpaired money.  Impaired money is money that has had some or all of the value removed from it.  In Roman times it meant clipping the coins.  Government would actually clip off a portion of the gold coin and then use it to make new gold coins from.  People would notice this and if they ever saw an unclipped coin in circulation they would hoard it while passing along clipped coins in their economic trading.  In more modern times, the US government removed all value from the dollar (complete impairment) by eliminating government sponsored convertibility of the paper into gold.  US government also removed all silver from most of our coinage in the mid 1960s.  As a result people began picking through their coins and hoarding the silver ones while passing along the silver colored kind that had no silver in them.

At the time such activity seemed a bit miserly and cheap.  After all, a 50 cent piece is just a half dollar, right?  But consider the facts.  Three 1964 and earlier half dollars weigh about 1.2 troy oz.  These coins were 90%

pure silver.  Thus, from 1.2 Troy oz. of these coins you could extract 1.08 Troy oz. of .999 fine silver.  Today's spot price for silver is $34.34 per Troy oz.  That means these three coins can today be exchanged for about $37 (each coin is worth more than $12).  I don't mean $37 if you find the right buyer and I don't mean $37 if you can find someone interested in buying old worn out coins.  I mean $37 all day long in every country on the planet because every country has a metals exchange.  In fact, $37 is the bare minimum.  Sell these on Ebay or Craigslist and the price will be more like $42 from my recent observations.  People are buying the silver content and the form it arrives in is not important.

So the cheap, moronic idiot who picked these silver coins out of the money supply has multiplied his/her dollar value by 24.6 x.  I don't care if you did this in the 1940s or in the 1960s, that kind of preservation of buying power is worth your time.  In fact I think the cheap moronic idiot was really more like a prudent, conservative, insightful saver.  For comparison with other investments, look at the Dow Jones Industrial Average.  If you bought 1 "share" of the Dow in 1964 it would be about $875.  Fast forward to today and that same investment would be worth about $12,000.  That's only a 13x gain.  So who is the moronic idiot, the person who invested in the stock market and paid trading fees and who had to do all kinds of paperwork at tax time and who had to hire an investment counselor and who has to pay capital gains taxes on his "earnings" OR the cheap, moronic idiot who simply followed Gresham's law and saved precious metal coins when it became clear that government was debasing the currency?

The most important part of Gresham's law is the last part.  Bad money will only drive out good IF the exchange rate is set by law.   So if someone is stupid enough to buy a pack of gum valued at $1 using two silver half dollars, the shop keeper will not give him $23 worth of change like he should given that each of the coins is clearly worth at least $12.  No, the shopkeeper will treat the coins as if their combined worth is only 1 dollar because government says that is all they are worth.  In other words, the exchange rate is set by law.  If the shop keeper comes across someone so ignorant, he does the transaction and then when the customer leaves he pulls a $1 bill from his pocket, puts it into the cash register and takes the 2 coins home.

Gresham's law goes into reverse only when people stop listening to government's valuation of things.  In other words, if shopkeepers begin to ignore the fact that government has set the price of a 1964 silver half dollar at 50 cents and instead allow people to spend them at their actual silver content value as defined by the global spot market for silver, then silver coins will come out of the woodwork like roaches.  People who don't know how to deal with the metals exchanges have been hoarding them all these years.  If shopkeepers begin to pay fair value for them then common people will finally have the chance to spend them at their actual market value.  Until that happen, the coins will just stay in the big glass jar.   Why would shopkeepers ever consider exchanging goods at full market rates of the silver content?  Simply because they begin to lose faith in the US government's ability to manipulate the value of its paper money.  In other words, they lose confidence in the con game.  They begin to worry about inflation eating away at the value of their savings.  They would rather have real money instead of fake paper monopoly money and silver colored coins that contain no silver.

There's no telling when Gresham's law will go into reverse but it always does eventually because Gresham's law is part and parcel of a debt Ponzi (fiat currency is a debt note...) and Ponzis always collapse at some point.