Redstate

By Repair Man Jack Posted in Economy — Comments (15) / Email this page » / Leave a comment »

Republican Presidential Candidate Ron Paul has made politics a lot more interesting this year. He believes a lot of things the GOP establishment doesn’t, and his entry into the race has made people discuss ideas that wouldn’t otherwise get put into the public forum. I salute him for contributing, but would rather take a pass on one his least useful contributions. Ron Paul has suggested taking the United States Dollar back on the Gold Standard and doing away with The Federal Reserve.

For some reason, this whole debate over Ron Paul's platform and on full-bodied and specie-backed currencies, reminded me of a course I took in Medieval History. One text, Mohammad and Charlemagne, by Henri Pirenne, had significant input on the impact of Islam's capture of North Africa and Spain on the currency of France.

Like America's economy today, the French economy, even under the Merovingian Dynasty, had a constant requirement for an expanding money supply. This was to do what any money is supposed to do; provide a medium of exchange, establish a baseline standard of value and store wealth.

Had the Merovingian French been content with the M1 the Romans left behind, as they fled before Theodoric, Gaiseric and Attilla with the same doomed finality with which the last US helicopter lifted off the embassy roof in Saigon, Henri Pirenne's historical masterwork would not inform a modern audience of the economic consequences implicit with Gresham's Law. Instead, the French expanded their economy and their currency in circulation, without appreciably expanding their supply of precious metals to support the circulation of these funds.

Prior to 476 AD, Rome had mined significant portions of its gold and silver in Hispania. They used these metals to back the Imperial Aureus. As long as the Romans kept digging gold as fast as they opened new markets, the Imperial Aureus was to ancient world currencies what Caesar's 10th Legion was to brutal, close infantry combat. When the currency fell behind the rate of expansion, the part of the world formerly in the Western Roman Empire met its economic Adrianople, as would be predicted by Gresham’s Law.

Gresham’s Law states that bad money drives good money out of circulation. A more accurate formulation thereof might read that money overvalued in proportion to its specie content is a great medium of exchange for the buyer, but a poor store of value for its recipient. I’ll hand you coins made out of rock all day, if you’re dense enough to give me a tall mug of ale in return. By the time Charlemagne took over as Holy Roman Emperor, buyers in France were literally attempting to find people gullible enough to take their coins chiseled out of rock.

The converse of Gresham’s Law states that coins with more specie than required to support their accepted value tend to leave circulation rather swiftly. These coins are storing more value than they will bring in exchange. Some merchants in modern America would really rather not bother with the pennies put in circulation in 2007. These same people would take a mint condition 1941 Wheat Penny off your hands in a heartbeat.

A hyper-accelerated version of this process occurred in Merovingian France. Once the Islamic conquests separated France from a steady flow of precious metals, the French currency went the way of Jacques Chirac’s moral integrity. The powerful nobles and the growing church took gold and silver coins out of circulation through taxes, tithes and blatantly unfair confiscation. The peasants and serfs got left to go chisel coins out of whatever specie they could find.

The end result of this downward spiral was a decadent Merovingian monarchy ruling over a desolate, impoverished peasantry that couldn’t read, couldn’t write and didn’t understand a word of the mass they attended on Sunday. Economic policy like this kept the Dark Ages of Europe ineluctable for several centuries. When a specie-backed currency doesn’t have enough specie, this is where people can end up.

Modern America would never be leveled the way the Merovingian France was by the rise of the Muslim Caliphate without a nuclear conflagration. We are blessed with land, resources and population that Medieval France could never even dream of. However, before considering a specie-backed currency, we should take a good, hard look at where the world gets its specie.

Modern America currently circulates $7,243,000,000,000 in currency. The current spot rate for an ounce of gold is $654.90 per ounce. That makes gold sell for $10,478.90 per pound. This means the US would require 345,600 tons of gold on reserve to back our current currency float; assuming we take no reserve risk.

The United States currently holds 8,133.5 tons of Gold. The current worldwide governmental holdings of gold for the 40 largest governmental reserves total 29,846.70 tons. The United States could only back less than 3% of it’s current M2 without acquiring more gold. This would leave us vulnerable to currency devaluation as predicted by Gresham's Law.

Simply put, Congressman Ron Paul longs for a simpler time when the US Government did not deeply involve itself in every aspect of our daily lives. On a philosophical level, I strongly sympathize with his concerns. On a more practical level, I’d like to hear his plan on for acquiring the 28,000 tons of gold the United States would require going back on the gold standard and only taking a 90% currency risk. That would probably be sufficient to insure that modern America and Merovingian France continue to have very little common economic history.

Update: Logwalker generously informed me that Bad Money Drives Good Money out of the econmy. (I knew this, but then again, I seemed to have gotten ny screenname bassackwards as well..)