Why Gresham omitted the "s" when he drafted his famous
law is not clear. What is painfully clear to U. S. citizens caught in
the wage-price freeze of 1971, however, is that Gresham's Law remains in
force: bad money drives good money into hiding. People will hang onto
their good money and meet their financial obligations with bad money so
long as the government declares the bad money to be legal tender. What
makes money "good" is its redeemability or its purchasing power in terms
of goods and services; sellers are happy to receive it in exchange for
their wares. So, what the had money really drives away from. the market
are the suppliers of goods, the savers and investors of the capital that
accounts for employment opportunities. These people will hoard their
current holdings or else take them to some other market where a better
money can be had in exchange.
The President's problem, or rather, the problem of the
people of the United States, is that bad paper money has flooded the
country. The Federal government is printing this money to pay its
obligations. Another name for the process is inflation: monetization of
the Federal deficit.
Now, when people recognize that dollars are rapidly
depreciating, their first response is to get rid of their bad money just
as fast as they can, spending it for almost anything in the way of
tangible goods or services. Of course, they still try to find bargains;
and it may happen that foreign suppliers afford the best bargains. Why
would that be the case? Why, because in a somewhat strange and
roundabout way foreign suppliers had, up to the time of the freeze, been
able to claim payment for their wares in "good" money rather than bad.
In effect, they were buying gold from the United States at the price set
in 1934 - $35 an ounce. Because that bargain was available to them in
the U.S., they were most willing and anxious to exchange cars and steel
and textiles and all sorts of goods and services at prices American
customers recognized as bargains.
Because the American people responded as they did to
protect themselves against inflation, the Federal government was obliged
either to outlaw such response or else stop its deficit spending and
expansion of the money supply. Quite contrary to most of the publicity,
the wage-price freeze of August 15, 1971, announced the intention of the
Federal government to persist in its policy of inflation - not stop it,
but step it up; reduce some taxes, cut down the supplies of foreign
goods, and make it illegal for an American citizen to offer more bad
money for any product than he had paid for a similar item before the
freeze. Certainly, there could be no reason for such measures if the
government meant to stop printing bad money and balance the Federal
budget.
The mislabeled "balance of payments" problem, implying
that foreigners aren't paying us what our exports are worth, is simply
the strictly domestic problem of an unbalanced Federal budget - deficits
printed out as money. It's hardly the sin of foreign governments if they
show greater fiscal responsibility than does our own; that sin is ours,
for urging or allowing our government to spend more than it collects
from us in taxes. Unless other national governments sin in sympathy and
unbalance their budgets to match our reckless rate of inflation, we
can't long maintain the fiction that our paper money is as good as
theirs. They may continue to sell us their goods at our inflated prices
but will not be so anxious to buy our goods at our inflated prices;
they'd much prefer gold, if they could get it, at $35 an ounce; hence, a
so-called "balance of payments" problem, all of our own making.
If the Federal government were seriously determined to
stop inflation - that is, balance its budget then it would have to seek
politically possible ways to shut off the spending. The process is
simple enough to describe: identify which subsidies or spending programs
are least attractive to U.S. voters and repeal them in that order.
Whether that would be the War in Vietnam, the exploration of outerspace,
foreign aid, farm supports, environmental improvement, unemployment
compensation, urban renewal, medicare, compulsory unionism, or any of
hundreds of other uneconomic and unprincipled governmental ventures is
strictly a political decision. But one thing is certain, there is no way
to maintain U. S. credit in the world market without curbing domestic
inflation, and the only way to do that is to whittle off some of the
Federal boondoggles. If politicians in power believe in voluntary
controls, let them voluntarily curb their spending. They then should
find neither reason nor excuse to control ours.
The Frozen Laborer
Government control of prices and wages, as
distinguished from market determination in open competition, boils down
in reality to control of people.1 Peaceful persons are
compelled by the government to use their lives and their property for
purposes or in ways other than they might have chosen.
The most common justification given for wage and price
control is inflation; people are said to be investing or spending their
lives and property recklessly, causing prices to rise. But the fact is
that inflation is simply another form of people control - a process by
which government takes scarce and valuable resources from private owners
in exchange for irredeemable promises to pay. Inflation is effective as
a form of people control so long as, and to the extent that, people
believe the government will redeem its promises in whole or in part;
they accept and hold money today in faith that it may later purchase at
least as much as now, and possibly more. The people are controlled
through their blind faith, their property taken without their knowledge.
Once the people open their eyes to the nature and
effect of inflation, lose faith in the government's promise to pay, then
government must resort to sterner measures such as a price and wage
freeze if it expects to control the people, take their property without
their consent. The government, no doubt, will continue to print and
spend money for its purposes, while denying individuals the right to
spend their money for their own purposes. In other words, governmental
control of prices and wages reduces the owner's bundle of rights
concerning the use and disposition of private property; that is a long
step back toward feudalism.2
Private property exists in many shapes and sizes, but
one of the most neglected and perhaps most important forms pertains to
the right of the individual to direct and control his own efforts, to
sell his services for the most attractive bid in the market as
distinguished from involuntary servitude.
The so-called Industrial Revolution, involving
specialization, trade, saving, investment, and numerous job
opportunities in various industries, did much to free the laborer from
the lowly status of serfdom - a steadily strengthened and expanded
bundle of rights to his own efforts. Then, government was asked, or
volunteered, to intervene on the laborer's behalf - and, in the process,
damage was done to his rights. The labor union that was empowered to
help him bargain exercised that political power to bargain for him
without his express consent. The power of the union to arbitrarily
exclude any laborer from bargaining for a given job opportunity
diminishes that laborer's property and his right to his own efforts. One
laborer's political power to strike or picket a given job opportunity
jeopardizes every laborer's right of access to the job opportunity of
his own choice.
Laws such as the Wagner and Taft-Hartley Acts in the
United States extend political privilege to union bosses and the favored
few, but at the expense of the property rights of laborers in general.
Various State and Federal minimum wage laws exclude from the market
those least skilled laborers unable or unwilling to earn the minimum
wage, thereby diminishing rather than enhancing their bundle of rights.
The regressive social security tax discriminates against laborers in the
lower wage brackets. And what some refer to as "the Welfare State
against the Negro" really concerns the modern infringement of government
regulation and control upon the property rights of the least skilled and
lowest paid laborers.
The government attempts too much in its various welfare
measures, spending more, much more, than it dare try to collect through
direct taxation of the supposed beneficiaries. Such deficit spending,
Federal borrowing from its captive banking system, is the process of
inflation which in due course manifests itself in what is called wage
control and what is in reality the regulation and control of the laborer
- much as in the days of feudalism.
Laborers and others who would defend their lives and
property against inflation and controls and confiscation must -first
insist that government mind none but its own business: policing the
market to keep it open.
And in any event, Gresham's Law does prevail: bad money
drives out goods.
1 See "Government should control prices but not
people," by Dean Russell, Cliches of Socialism (Irvington, N. Y.:
Foundation for Economic Education, 1970), p. 222.
2 See "Changing Concepts of Private Property," by
Bertel M, Sparks, THE FREEMAN, October, 1971, p. 583.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.
November, 1971, VOL. 21, No. 11.
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