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II. Money in a Free Society

11. Coexisting Moneys

So far we have obtained the following picture of money in a purely free economy: gold or silver coming to be used as a medium of exchange; gold minted by competitive private firms, circulating by weight; prices fluctuating freely on the market in response to consumer demands and supplies of productive resources. Freedom of prices necessarily implies freedom of movement for the purchasing power of the money-unit; it would be impossible to use force and interfere with movements in the value of money without simultaneously crippling freedom of prices for all goods. The resulting free economy would not be chaotic. On the contrary, the economy would move swiftly and efficiently to supply the wants of consumers. The money market can also be free.

Thus far, we have simplified the problem by assuming only one monetary metal--say, gold. Suppose that two or more moneys continue to circulate on the world market--say, gold and silver. Possibly, gold will be the money in one area and silver in another, or else they both may circulate side by side. Gold, for example, being ounce-for-ounce more valuable on the market than silver, may be used for larger transactions and silver for smaller. Would not two moneys be impossibly chaotic? Wouldn't the government have to step in and impose a fixed ration between the two ("bimetallism") or in some way demonetize one or the other metal (impose a "single standard")?

It is very possible that the market, given free rein, might eventually establish one single metal as money. But in recent centuries, silver stubbornly remained to challenge gold. It is not necessary, however, for the government to step in and save the market from its own folly in maintaining two moneys. Silver remained in circulation precisely because it was convenient (for small change, for example). Silver and gold could easily circulate side by side, and have done so in the past. The relative supplies of and demands for the two metals will determine the exchange rate between the two, and this rate, like any other price, will continually fluctuate in response to these changing forces. At one time, for example, silver and gold ounces might exchange at 16:1, another time at 15:1, etc. Which metal will serve as a unit of account depends on the concrete circumstances of the market. If gold is the money of account, then most transactions will be reckoned in gold ounces, and silver ounces will exchange at a freely-fluctuating price in terms of the gold.

It should be clear that the exchange rate and the purchasing powers of the units of the two metals will always tend to be proportional. If prices of goods are fifteen times as much in silver as they are in gold, then the exchange rate will tend to be set at 15:1. If not, it will pay to exchange from one to the other until parity is reached. Thus, if prices are fifteen times as much in terms of silver as gold while silver/gold is 20:1, people will rush to sell their goods for gold, buy silver, and then rebuy the goods with silver, reaping a handsome gain in the process. This will quickly restore the "purchasing power parity" of the exchange rate; as gold gets cheaper in terms of silver, silver prices of goods go up, and gold prices of goods go down.

The free market, in short, is eminently orderly not only when money is free but even when there is more than one money circulating.

What kind of "standard" will a free money provide? The important thing is that the standard not be imposed by government decree. If left to itself, the market may establish gold as a single money ("gold standard"), silver as a single money ("silver standard"), or, perhaps most likely, both as moneys with freely-fluctuating exchange rates ("parallel standards").13

  • 13. ]For historical examples of parallel standards, see W. Stanley Jevons, Money and the Mechanism of Exchange (London: Kegan Paul, 1905) pp. 88-96, and Robert S. Lopez, "Back to Gold, 1252," The Economic History Review (December 1956) p. 224. Gold coinage was introduced into modern Europe almost simultaneously in Genoa and Florence. Florence instituted bimetallism, while "Genoa, on the contrary, in conformity to the principle of restricting state intervention as much as possible, did not try to enforce a fixed relation between coins of different metals," ibid. On the theory of parallel standards, see Mises, op. cit., pp. 179f. For a proposal that the United States go onto a parallel standard, by an official of the U.S. Assay Office, see J.W. Sylvester, Bullion Certificates as Currency (New York, 1882).
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