I was wondering what would happen if the value of gold increases so much such as any good could be sold at a price which represents less that a molecule of gold. From that point on, supposing that productivity keeps increasing faster than the supply of money, more and more goods will start to be sold at non-gold values (a percentage of a gold molecule). How would people react? Would that allow to establish a double standard?
If it becomes too scarce, then it’s value as money would naturally decline among all trading individuals. A new money would replace it. Be it silver or other easily divisible (and relatively stable) commodities.
If that were to happen, and I don’t think it’s a practical concern, there would be some crazy gold-mining going on
Selgin has a paper on this, he says that when he was doing research on private minting in England he came across the situation in which there was a shortage of small change. Under a full-reserve system in which there is some precious metal as the base money it is quite possible that the metal in question will be too valuable in that, small change will be tiny or not valuable enough in which case the larger coins will be huge. Now, he notes there’s a few ways out of this. Either you use token coins for the smaller amounts, but this leads to problems of forgery. Or you use two different metals, at which point greshams law kicks in.
OTOH, FRB solves this.
Hi Giles,
Doesn’t Gresham’s Law only kick in when an artificial fixed exchange ratio is imposed regarding the two metals?
I know, I’ve already posted something about Selgin’s paper (100 Percent Reserve Money: The Small Change Challenge). I still don’t find that much convincing, just as I think that FRB wouldn’t be successful in practice. 
Lilburne, yes, it does. But if you imagine a banking system in which both gold and silver are used as media of exchange coins made up of these metals would presumably trade at their face value. Now, this is akin to an artificial exchange ratio.
Oh my. Even Selgin himself pointed out that the shortage was caused by state intervention.
“quite possible” because Giles Stratton says so.
according to Giles Stratton and his crystal ball.
Except the only sensible way. Remove state intervention and the problems caused by state intervention disappear.
LOL. How clueless.
What on earth do you mean ? The face value of gold or silver coins is just a weight. 1 ounce of gold trades for X ounces of silver. X is of course variable.
Giles, if the face values represented “a certain weight of gold” vs. “a certain weight of silver”, wouldn’t those face values represent different denominations? As long as the exchange ratio between a given weight of gold and the same weight of silver was allowed to fluctuate in the market, there would be no overvalued money to drive out undervalued money (Gresham’s Law in action), because all money units would be valued appropriately. Outside of being forced to by law, people wouldn’t value one “dollar” of gold the same as one “dollar” of silver, just because they bear the same name, unless the values of the two amounts of metal were actually the same on the market.
That’s how I’ve always understood it.
Lilburne, no matter if that is the case, if they exist two different media of exchange there will have to be some sort of exchange rate between them. Whether it be shops quoting their prices in one metal and offering some sort of exchange rate for the other (i.e. the LvMI sells books in gold and says you can pay in silver at a certain exchange rate). Perhaps this might not be a strict case of Greshams law (although, I believe it is) it certainly has affinities.
Perhaps the bigger, but related, problem is that of the unit of account. Presumably only one of the metals could serve as the unit of account, but in this case there would almost certainly have to be some sort of exchange rate that corporations use. In which case all the usual problems follow. Now, I don’t think the seriousness of this problem can be decided a priori so I don’t think I can comment. I know Selgin has and I’ll give his piece a more thorough reading and get back to you.
no, as lilburne and david said, greshams law is only relevent when the exchange ratio is artificially fixed.
free floating exchange rates cause problems? like the fact that the exchnage rate between apples and pears on the market is free floating ?
Right. And we can’t have that. But paper is going to fix that problem. Actually paper can fix any problem.
As Lilburne has pointed out, money is on one side of every exchange, this is where the problem comes in. Look no matter what if there are to different media of exchange there has to be some sort of “artificial” exchange rate between the two.
what is artifical about it, if it is not by fiat?
talk about papering over the gaps!
It’s artificial in the sense that it isn’t the market price. I think this is somewhat clear, I mean, this is what is harmful when we speak of artificial prices set by the government. They don’t reflect supply and demand, likewise, an exchange rate set between gold and silver would have the same problems. Unless of course, it was updated continuously with changes in the market price. But we’re sort of getting into Walrasian territory now, I’m not sure you’d want that.
I don’t see why the price of gold in terms of silver wouldn’t fluctuate to reflect supply and demand in a free market.
what are you talking abou?. an ounce of gold is an ounce of gold. you have coins which are weights of gold. and ounce of silver is an ounce of silver. silver coins on their face bear their weight. there is an exhange rate between the two types of coins. it is not fixed, apart from that gold is fixed to itself, silver to itself. between gold and silver it floats on the market just like all prices do (should do). if it helps you to understand, you can think of the most widely accepted medium as being ‘money’ and the other just a preciously valued medium that is often, though not so widely, accepted in exchange. make up a name for that. ‘noney’. so gold is money. and silver is noney. and noney has a money price. and if you want to buy stuff that is so cheap its hardly worth gving up money for, give up some of the noney you bought in bulk in exchange for a little of the money you spent on it. you routinely spend a very little money to buy enough noney to facilitate your purchase of trivial treats.