The following article was written by Clifford F. Thies and appeared on the web site of the Ludwig von Mises Institute.

It used to be that every economist worth his salt knew Gresham’s Law (or, if he was Polish, Copernicus’s Law): “bad money drives out good.” Narrowly understood, this rule says that when the government requires people to accept different forms of money at an exchange rate fixed by law, the form of money that is overvalued (the “bad money”) will circulate, while the form of money that is undervalued (the “good money”) won’t.

Now comes a new translation of the plays of Aristophanes by Paul Roche, among them “The Frogs,” which has the oldest known expression of this rule:

You know what I often think:
We treat our best men
The way we treat our mint
The silver and the golden
We were proud to invent
These unalloyed
Genuine coins, no less,
Ringing true and tested
Both abroad and [in] Greece
And now they’re not employed
As if we were disgusted
And want to use instead
These shoddy coppers minted
Only yesterday
Or the day before
(as if that matters).
(Aristophanes: The Complete Plays, trans. Paul Roche, New American Library, 2005, p. 573)

In “The Frogs,” two citizens of Athens descend into Hades for the purpose of resurrecting two well-respected politicians of the past to save the city-state from its current, corrupt rulers. The current rulers are said to be like the base-metal coins in circulation, while the rulers of the past are like the full-bodied, precious metal coins that formerly circulated.

The full-bodied coins “rang true”; that is, when flipped onto a solid wooden table, they gave out a distinctive ring. Think of Edgar Allen Poe’s “The Bells.” The heft, feel, and tone of the coins were sufficient, for most purposes, to distinguish a counterfeit from the genuine article. And these coins circulated abroad as well as at home because they had intrinsic value. In contrast, the debased coins were impossible to distinguish from any counterfeit, since they had no distinctive qualities, and were repugnant to foreigners and anyone else not compelled by law to accept them, just like current politicians.

The passage doesn’t actually say how the base-metal coins came to replace the full-bodied coins. Nevertheless, we can infer that the audience knew what had happened, since the play was a comedy, not an economics lecture. From historical sources, we know that Athens had been involved in a series of wars against Sparta and other Greek city-states, and that it was threatened by Persia.

The continuing expenses of these wars depleted Athens’s treasury. Even the gold and silver objects at the temple were melted and recast as money. Then the city resorted to debasement and to legal-tender laws compelling acceptance of the debased coins at the values of precious-metal coins. Soon, the coins were recast only with base metal.

The story of debased coins and their connection with fiscal imbalance and corruption is perennial. The prophet Isaiah (1:22) writes “Your silver has become dross, your wine diluted with water.” Dross is base metal. The silver coins that had formerly circulated had come to be replaced by coins of base metal. The base metals might be polished so as to look like silver, as in the case of many contemporary US coins, but this only hides the corruption that would otherwise be manifest in the coins.

Similarly, the Islamic scholar Ibn Taymiyyah (who can be viewed as a forerunner of Wahhabism) wrote, at a time of continuing warfare against Christians to the west and Mongols to the east, “If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches which they possess.” Like Isaiah and Augustine, Ibn Taymiyyah wrote at a time of decline in his civilization and called for revival and separation from the world.

Speaking of the Mongols, it is to the Emperor Kublai Khan that we owe the invention of paper money. Marco Polo, who brought the news of this innovation to the Europeans, wrote in his travelogue, “nor does anyone, at the peril of his life, refuse to accept it in payment.” During the later years of Kublai Khan’s reign, the issues of paper currency became excessive, and an inflationary cycle got underway.

During the reign of his successor, the fourth Mongol emperor, the world’s first “currency reform” was undertaken, with a forced conversion of the old currency for the new at the rate of five to one. The former prosperity was also replaced by corruption and decline.

Upon the overthrow of the Mongol dynasty in the 13th century, and the ascension of the Ming dynasty in China, history recorded yet another milestone in the evolution of money, the first inscription of a legal-tender law onto paper money: “This paper money shall have currency and be used in all respects as if it were copper money.” At the beginning of the Ming dynasty, 17 units of paper money were the equivalent of 15 units of copper money. By the 15th century, 5,000 units of paper money were the equivalent of 15 units of copper money. Economic conditions deteriorated, and the empire suffered incursions by the Tartars.
Our own country’s experience with legal-tender laws goes back to the colonial days, when the colonies issued paper money then known as “bills of credit.” The first issue was by the Massachusetts Colony in 1690, during King William’s War, when the English colonists of Massachusetts thought to outfit an expedition to take Quebec, then a French colony. The bills were inscribed, “This indented bill of Five Shillings … shall be in value equal to Money.”

Soon after this war came Queen Anne’s War and another issue of bills of credit. Then came another war whose name escapes me just now, and then yet another. Each time, more bills of credit. And, of course, accompanying all these Bills of Credit was inflation.[1]

During mid-century, the English limited the ability of the American colonies to issue bills of credit, and the inflation was ended. Later in the 18th century, the American colonies chafed under the burden of this British constraint on issuing paper money. This constraint was among the grievances referred to in the Declaration of Independence. According to Benjamin Franklin, it was the primary one. And so they had a revolution.
Freed of the outside constraint on issuing paper money, guess what? As is obvious to everyone who does not prostrate himself before the throne of big government, there was inflation. And to compel acceptance of the paper money, guess what? Those not accepting the paper money being issued by each of the self-proclaimed independent states or by their Continental Congress were to be treated as Loyalists and have their property seized.

So, in view of the inflation that burst out during the Revolution and Confederation periods, there was called a convention for the purpose of drawing up a new agreement among the states. This agreement, among other things, limited the ability of the state governments to issue paper money and did not grant such a power to the federal government. What is remarkable about the constitution that they drew up is not that it only restrained the issue of paper money for a certain number of years (until the United States got into the cycle of war, deficit spending, inflation, corruption, and decay), but that it restrained the issue of paper money for as long as it did.

So let us, with the same cruel humor, make fun of our condition as Americans the same way Aristophanes did of the condition of Athenians. Let us send a delegation to Hades to resurrect Ludwig von Mises, Thomas Jefferson, John Locke, and Aristotle to replace the corrupt, debased politicians we now have.
Clifford F. Thies is the Eldon R. Lindsay Chair of Free Enterprise at Shenandoah University in Winchester, VA.

[1] During one of these wars (does it really matter which?) came yet another first in the history of money: the first use of a price index to try to deal with inflation. By contemporary standards, it was a crude index. Only the prices of four commodities were involved.
An economist friend of mine, who is a Salesian Brother, recently gave a lecture at Oxford University reminding us of one major problem that is neglected by many economists and by papal writings on economic things. Yet this just might be the biggest problem that we are facing. All attacks on the free market by Catholics saying that it fosters greed, etc., have been shown to be nonsense, and that greed resides in the human heart. I learned this many years ago in the philosophy courses I took at a good Catholic university as an undergraduate. You would think that our clergy would also have learned it as well. Both the rich and the poor can be just as greedy.  

But the “morality” industry, that is, those who make their living, so to speak, arguing that the cause of our financial problems is the lack of morality inherent in the free market, have missed the major point made by my Brother colleague: the problem of “rent seeking.” Famous economists Robert B. Ekelund and Robert D. Tollison define rent seeking as: “The behavior associated with the use of scarce resources in the pursuit of monopoly profits created by government action; the process of using scarce resources in an effort to obtain rents or a transfer of wealth.”[1] A rent is the payment to a factor of production such as land, labor, capital and/or entrepreneur skill in excess of its opportunity costs.[2] Basically a rent is profit. What the lay person calls rent, as in apartment rent paid to a landlord, is just one type of rent. And the rent paid becomes a rent only when the money paid for the apartment exceeds the cost of maintaining it and repaying the money loaned to build it. (This is one of the problems of rent control—government rent ceilings are usually too low to maintain the building so the owner has to abandon it and chalk it up a loss. The result is a slum.)

Notice that the definition given above includes government. How this works is that in exchange for financial and other support in future elections,[3] government leaders have an open door for those in business or unions who seek monopoly privileges. The privileges must be licensed by government, or the goods or services of the rent-seeking company will be open to competition, which will allow competition to drive down the prices charged for a similar product or force the rent-seeking company to improve the quality. Take the example of General Electric, oddly the company for which Ronald Reagan used to be a spokesman. GE is a failing company, but it also owns NBC. It appears that GE president Jeffrey Immelt got a lump of money from the government TARP funds, which was only intended to go to banks. It was given to GE’s financial arm, but since GE is not a bank, none of the strings attached to the TARP money banks received were applied to General Electric. GE CEO Jeffrey Immelt is a frequent visitor to the White House, and I am sure they have a coffee cup with his name on it. You can see the rent seeking here as NBC and MSNBC, owned by GE, were almost news outlets for the Obama campaign and now for his administration, bitterly attacking Obama’s critics. In addition, GE is a big supporter of the cap in trade (cap and tax) bill. One of the reasons behind its support is that it would stand to manage billions of in cap and trade contracts if the deal goes through. Not coincidently, Mr. Immelt is on the Board of Directors of the New York Federal Reserve Bank, which is the most powerful of the Fed banks.

I am not picking on GE, but I am attacking the notion that the government has a role in managing the economy, because this opens the door to groups and companies looking to get a hand on government monopoly privileges and your tax money, instead of earning it the hard way. Take the current “Jobs Summit” now being held in the White House. All of the Obama cronies are there: big unions, some big corporations, all looking for handouts or privileges. Noticeably missing was the US Chamber of Commerce, a public critic of Obama’s economic policies, and other representatives of small business owners—small business which employs most American workers. It was reported that when one person at the conference told the President that if he wants to help the growth of jobs, do not pass the health care plan, Obama replied that “we” are going to pass it whether you like it or not.

All this is rent seeking, and government is the middleman in the process. If the government were strictly prohibited for touching business or labor in the country, these folks could not get anything from it. Sadly, Catholics are among the biggest supporters of government’s running of the economy; therefore, Catholics are big supporters of rent seeking to the detriment of the economy and the common good.

[1]Robert B. Ekelund and Robert D. Tollison, Microeconomics, 3rd edition (New York: Harper-Collins, 1991), 676, my italics.
[3]In other countries, outright bribery.