While it is hard enough to claim that a “law” in physics is actually a law, it is much harder to do so in economics where cause and effect are as immutable as the whims of human behavior. Yet purportedly there are laws, and one that has stood the test of time from antiquity to the present day is Gresham’s law, which states, ‘Bad money drives out the good.’
Bad money is money that is not intrinsically worth the value it claims to represent, for example paper money is never intrinsically worth its “face” value. Good money is what it says “on the tin”. Once upon a time a 1c coin was worth 1c in copper and whoever had 18. have seenth/19th The centenarian “big” percentage will understand how it can have real value in the metal. You can also see inflation in old coins, as units move from good money to token money. The coins first shrink in size, then are completely stripped of their intrinsic value and end up, like American coins, covered with iron in luster, like denarii washed with Roman silver.
The decline of a good money currency by a bad currency variant occurred through coins of a higher percentage of the precious metal, diluted with a lower denomination metal re-issued at a lower percentage of gold or silver. This adulteration removed the good coin to make up for the bad coin and then the prices were adjusted upward to compensate. No one spent the good coin, they hid it, so the good coin went out of circulation and went to a hoarding.
Meanwhile the issuer, usually a king who had blown his treasure over endless wars and other such disgruntled lives, was behind the move. He hovered over as many good old coins as he could, melted them and reissued them at lesser purity and pocketed the remainder. It was often illegal to put back old stuff, but the people did, while inflation taxed the people and the king replenished his treasury, at least for a time.
Bad money drives good money out of circulation, because the good remains hidden and the bad circulates.
So today we have a situation where token money, nowadays called fiat, is being debated as a result of the economic shock of the pandemic response. In order to bridge economies over the chaos of the stalled global economy, large amounts of new money have been printed to force solvent societies to halt their economic activity. Productivity-lost assets could have caused a catastrophic economic collapse through contagion, but that disaster was averted by trillions of bailouts that kept the system liquid and ticking and prevented the reaction of a vicious cycle of default and foreclosure. .
However, with less goods and more money remaining in the system, the key condition of Milton Friedman’s hypothesis of inflation is that “inflation is always and everywhere a monetary phenomenon, in the sense that it can only arise from more rapid growth.” . Quantity of money compared to production.
By now the debate is over, inflation is here and it is going to stay here.
Then there is bitcoin. This is good money. It has limited supply and is growing slower than inflation and slows by half every four years. Apparently ethereum is now also a deflationary penny, in which any burn in excess of mining fees is mined as a reward. Crypto is also often lost, like old gold, forever, which further reduces its supply. While its intrinsic value is debatable, its inflation resistance is appreciated.
How does Gresham’s law affect the future of crypto? By simple substitution of currency types: Fiat beats out crypto. This will happen?
The modern government cannot adopt crypto because the driving engine of democracy and its politics is the ability to print token money when needed and as it sees fit. The government simply cannot operate with old style “gold standard” sound money because it requires a lot of flexibility to reduce or expand the money supply for all kinds of good and bad reasons.
Here are just a few of those reasons:
- To prevent economic collapse in the event of a disaster like war or plague
- to bribe voters
- To provide perpetual pension to government employees
- Providing adequate funding for rapidly growing economies due to technology
- costs to socialize
- to redistribute money
- Funding the government when tax collection isn’t enough, isn’t practical, or has been wildly evaded.
What’s more, a good penny, like gold or bitcoin, is only a pen stroke away from derivatives that create an infinite amount of paper or digital proxy. So sound money can be quickly underestimated and desired or not changed.
So with the government being forced to keep fiat currency, even if they want to pretend their plans for digital currencies are any of the qualities that give sound money crypto their allure, they are nothing but Fatty by any other name and bad money.
Currency will always be fiat currency and sound money crypto will never replace it while our current system of government is in place. Fiat will keep crypto at bay, an asset rather than a day-to-day currency.
So here’s a thought. If you can change the rules of a blockchain such that a king can resell his coins, is that perfect money?
If you can change the way a crypto works as a developer and king of your crypto, isn’t that crypto just fiat? With Ethereum moving from proof of work to proof of stake, isn’t this dramatic transition from good money to fiat currency?
Blockchain is computing meets politics. That’s why it’s so powerful. So the moment you let people make drastic changes to your rules, you have a legal right, and what’s worse, if those people act on a ‘one token, one vote’ basis, your There is an oligarchy.
Bitcoin’s rule set is therefore almost impossible to change, making it seem like a stronger good money promise than Ethereum’s ever pivoting regime.
Meanwhile, fiat is going through an aggressively bad money period that will move cryptocurrencies into sidings where they will pool as haven assets.
So if Gresham’s law is to be justified, for crypto to eliminate existing fiat currencies, it needs to exclude bad fiat currency. While this may sound absurd, it may explain the sudden explosion of junk coins such as the Shiba Inu, the abundance of which drives the public into delirium.
Yet the argument can be controversial, because before us we see the metaverse opening up, a place where crypto can flow freely and an entire generation sits in this fiat currency world, but instead the world of blockchain. Willing to live and transact in