For those people who are familiar with the history of gold and silver as money, they would have run into what is known as Gresham’s Law.

Gresham’s Law simply states: “Bad money drives out good money.”

“Good money” is commodity based, meaning that whatever you are using as money has the same value or slightly higher value (due to minting costs) than whatever the money is made of. For example, if we use 1 oz 0.999 pure silver coin as money in a free market, the value of that coin in the market place will be constant, regardless of the markings on it – as long as people are confident in the weight and purity and can easily verify it.

“Bad money” is where we have physical money made from a commodity that is significantly cheaper than what it is worth in the market. Fiat money meets this definition. Bank of Canada notes (paper money) are printed in units of 5, 10, 20, 50, 100, and 1000 dollars. It costs 9 cents to print a Canadian note in any denomination – determined by the pretty designs on them, not by weight or purity. Electronic credit costs even less. How much does it cost to print digital bits?

Gresham’s law means people will trade using bad money before using their good money. The good money will be hoarded. Suppose you had two nickels in your pocket. You know that one is 92% silver, and the other one was plated steel. Which would you spend? The steel one of course. The good one you would bring home and put it in some jar in the basement, as its melt value is higher than its legal tender value.

Good money has value because actors in a free market decided it did. Gold, silver, and copper evolved as money. Salt used to be money in some countries, but as markets grew through transportation, salt became plentiful, thus its value was debased to the point of halting its usage as money.

Bad money has value because the State declared it “legal tender” (a euphemism for “use this money or else…”), demanded that their money be used to pay taxes under the threat of violence, and outlawed any other form of payment in contract law – parties seeking redress in a court would have their case thrown out if payment was not legal tender. The State wanted to obtain a monopoly on currency issuance – meaning that only the State gets to counterfeit money.

The State wants this as it allows them to finance anything they want without being held accountable to the people in the form of taxation rates. If there was no State issued currency and a nation was on a gold standard, the State could only raise more money by taxing people who would revolt. It is much easier to steal from people via inflation (printing too much money, thus diluting its value per unit) rather than taxation. People understand taxation – the State taking money from their pockets, but they don’t understand inflation – the State devaluing their dollar without taking the dollar directly.

Most gold standard advocates have these long drawn out detailed plans how to “re-implement” the gold standard. They are missing the point as they are asking the State to help them with the implementation. The State will never relinquish control on their currency issuance and theft (taxation) scam, as it is the foundation of their existence. All that has to happen is to abolish the Central Bank and repeal Legal Tender laws, leaving the free market to decide what is the best form of money. Free market forces would probably choose gold, silver, and even copper based on thousands of years of history – if the State allowed these forces to operate. What do you think the State will do? Abolishing these things would effectively abolish the State!

In a true free market, Gresham’s law would NEVER apply! There would be no State to violently impose their paper notes on the market. In fact, Gresham’s Law would be reversed: “The good money drives out the bad.”! Physical money could ONLY be made of and valued by weight and purity. No one would accept paper notes with arbitrary units like dollar/pound/peso or whatever.

Even if we were to abolish the State, we could not simply expect a smooth transition to this sound money system. Mountains of debt, derivatives, and hedging funds etc. have been created on the premise of “monetary inflation”. Government and the banking cartel will never allow the issuance of currency to be wrestled away from them. Only a complete collapse of the current system would do that. Would sound money arise from the ashes?

People have been conditioned to look to the State for ALL solutions instead of taking it upon themselves to create and defend the risks/responsibilities/rewards of a true free market. It will be a difficult cycle to break.