Artificially undervalued coins: government interference cripple the free market

December 23rd, 2006

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We wonder at the wisdom of government intervening into the free market to maintain the status quo. Granted, sometimes the government have no choice but to impose controls in order to prevent a full-blown crisis from developing. But our question is: how did such condition (that require government interference) occur in the first place? The fact that control imposition is required points to the fact that something has gone wrong in the first place. Worse still, sometimes government prove their ineptness through their policy. The recent Thai government decision (and subsequent retraction) to impose capital restrictions to control its currency is a case in point.

Today, we look at the situation described in our previous article, One funny effect of monetary inflation: ?New rules outlaw melting pennies, nickels for profit?. This is exactly a repeat of what happened in the 1960s when the US government made it illegal to melt silver coins. The fact that the underlying value of a coin far exceeds its face value proves that there is a serious underlying problem in the monetary system. As Murray Rothbard said in What Has Government Done to Our Money?:

Government imposes price controls largely in order to divert public attention from governmental inflation to the alleged evils of the free market. As we have seen, “Gresham’s Law”?that an artificially overvalued money tends to drive an artificially undervalued money out of circulation?is an example of the general consequences of price control. Government places, in effect, a maximum price on one type of money in terms of the other. Maximum price causes a shortage?disappearance into hoards or exports?of the currency suffering the maximum price (artificially undervalued), and leads it to be replaced in circulation by the overpriced money.

In other words, the US dollar notes (artificially overvalued money) will eventually drive out nickels and pennies (artificially undervalued money) out of circulation. Even if the people faithfully obey the law by refraining from melting their nickels and pennies, we can be sure many of them are thinking of hoarding them right now. If ever the nation should be plunged into a financial crisis of hyperinflation, we are sure those coins will be traded as money at their worth far above their face values. In that case, even if the government is still inept enough to impose another law to prevent it from happening, such usage of the coins will be driven underground as a result.

We heard rumours that this state of affairs is also happening elsewhere in the world?South Korea and Philippines (where people are exporting Filipino coins to China to be melted). This is indeed another sign of the times. Be warned. Buy gold. Hoard the coins.

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