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(Corrects story that ran at 12:13 p.m. ET May 6 to restate the principle of Gresham's Law in the third paragraph.)
VANCOUVER, Canada (
Bullions Bull Canada) -- In many instances, simple principles give expression to important, elementary Truths. In less formal contexts we often term such thinking "common sense."
Conversely, merely because a principle expresses a simple thought does not mean it automatically conveys some important or elementary truth. Instead, sometimes "simple" is merely simplistic. Closer examination reveals the principle lacks validity, generally due to a combination of faulty conceptual understanding and the use of misleading semantics.
This is precisely what one finds on any rigorous analytical scrutiny of the economic myth known as
Gresham's Law. For those readers not familiar with this dogma, Gresham's Law expresses the seemingly obvious idea that in any economy "bad money will drive out good money."
This struck me as a rather silly "law" since it is one that rarely has any application in our modern economies, which have no "good money." However it was only after pondering the brilliant work/analysis of Hugo Salinas Price on the concept of
"parallel currencies" that the actual mythology inherent in Gresham's Law became apparent.
He provided a practical, economically viable framework for introducing silver "money" into an economy to function as a "parallel currency" alongside our paper currencies. That analysis led me to ponder the dynamics: What would happen after good money (silver) was introduced as a parallel currency?
In fact, the result of that process is what exposes the primary fallacy of Gresham's Law. Before detailing how and why this is an inevitable result of such logical analysis, a helpful metaphor is in order.
Ice, like money, is both a tangible item and tangible concept. How do we define "good ice?" While it's possible to construct more oblique standards, the obvious scale by which to measure "good ice" is temperature. Ice is supposed to be cold, thus "good ice" must be colder ice.
This brings us to the inverse concept: "bad ice." If "good ice" means colder ice, then "bad ice" must (as a tautology) refer to warmer ice. Here is the key conceptual point. When it comes to the quality of ice, ultimately we only have "good ice." So-called "bad ice" is simply water. It is no longer "ice" at all.