Interchange between Professor Robert Mundell and Larry Parks re: the Legal Tender Issue
The following encounter between Dr. Robert Mundell, the most recent winner of the Swedish Bank Prize in Economic Sciences in Memory of Alfred Nobel, a.k.a. ?The Nobel Prize in Economics,? and FAME Executive Director Larry Parks occurred during the question and answer period after Professor Mundell spoke at the Fall Committee for Monetary Research and Education (CMRE) Dinner on October 27th, 1999. There was also an intervening question from another questioner which is also duly recorded. [The wording is exact and was transcribed from a tape recording made by the CMRE. CMRE tapes are offered for sale to the public.]
Larry Parks: The question I would like to put to you is: the money we have now seems to have been coerced upon us. American Labor, at the end of the last century, put forth the notion that we only need legal tender laws to force people to take bad money. That if we have good money legal tender laws are not needed at all.
Would you say what your views are on the legal tender laws and if there is any justification for them at all and what you would do about that?
Robert Mundell: I think that legal tender is a very old institution. It certainly goes back thousands of years and legal tender is an institution, whether we like it or not is going to stay. Because legal tender is an institution that, whenever you have overvalued money, you must have legal tender in order to enforce it as a means of payment. We?re living in a world of overvalued money; you could never imagine a more overvalued money than paper money. As long as you have paper money systems, you will certainly have a need for legal tender laws.
Another Questioner: You made a comment on the paper money system as being overvalued as being why we need legal tender laws. Would you say that the paper money is overvalued because it has no intrinsic value, number one? And number two, would you substitute for it gold, and if you did how would you handle the gold reserve for the banking system? Would you have 100% reserve or fractional reserve? How would you find the liquidity to pay the interest in a pure gold standard system?
Mundell: I don?t think I?ll remember all the aspects of your question. But first is that paper currency is about as overvalued a currency as you can get. Because paper money has no intrinsic worth. But the monetary systems of the past were also typically overvalued.
I?ve been doing a lot of work on monetary history and I really depart from the views of those who look at the Roman monetary system as being a kind of bimetallic system in the same way as the 19th Century was a bimetallic system. The 19th Century system wasn?t overvalued. Gold and silver were worth the same as commodities as was the metal, and that was a function of the free coinage system that had been introduced since the days of Charles II. From then on until 1862 when the U.S. went off gold. But the Roman system was very different from that because the bimetallic ratio was fixed. One metal was always overvalued. Gold was always overvalued throughout the whole regime of the Roman Empire. The ratio of 12:1, which was fixed, which was that for a long time overvalued gold by 60 or 70 or 80 percent.
You had to deal with overvaluation and even in the case of that kind of gold standard you needed a legal tender law. In Roman system they moved from the silver Denarius and eventually to the gold Areus. You needed to make that a legal tender because it [the Areus] was overvalued compared to other currencies. I just think that we?re living in a world where all the wealth is denominated in paper money.
There?s no institutional mechanism by which we could ever duplicate the kind of financial system we have under a system that relied almost entirely upon gold. Of course you could always have a system that used a lot of paper that was in some sense convertible into gold. You could always find a price of gold that you could convert that paper theoretically into gold. But I don?t think anyone has thought in terms of the enormous price of gold that would be required in order to achieve that.
Larry Parks: George Soros says in his book Soros on Soros that the gold standard had to be given up because it did not make possible a lender of last resort. And says Soros, because financial markets are in his words ?inherently unstable? you have to have a lender of last resort. In your view are financial markets inherently unstable and must we have a lender of last resort, and if so, what makes financial markets inherently unstable?
Robert Mundell: Well, I don?t have to answer the last one because I don?t believe they are. I don?t believe financial markets are unstable. I know what people have talked about the crisis in Asia or something is a talk about unstable financial markets or unstable capital movements. My own view is that there are no unstable capital movements; there are only bad exchange rate systems. Whenever you have a bad exchange rate system, or a system that has no anchor for monetary policy, it doesn't even have to be an exchange rate anchor, it doesn't have to be gold but there has to be an anchor for monetary policy. Whenever there is uncertainty about that you are going to have unstable capital markets. Capital movements. I don?t agree at all with Soros? idea about the inherent instability of capitalism. I think this is something that has been brought over from the Marxism of Eastern Europe. I think it is completely wrong idea.
Larry Parks: So, do you need a lender of last resort?
Robert Mundell: Well, the central banks of every country act as a lender of last resort to their own banks. The Fed can act as a lender of last resort. But, of course you can't allow that to go too far. And countries that have adopted stable systems, like Argentina for instance, had to give up they couldn't say also they were going to have this stable currency-board-type arrangement in Argentina and say at the same time that the bank of Argentina would become a lender of last resort. In 1995 when the banks started to fail due to the ?tequila effect,? as it was called, the government very wisely decided not to change the convertibility law that would allow the bank to become the lender of last resort but instead sought to solve that through the government itself and through the auspices of the IMF.
Commentary by Larry Parks
When the monetary authority seeks to endow what would otherwise be a possibly worthless substance (or something that would not be valued as greatly as the monetary authority would like it to be), such as ink and paper, with ?value,? it must somehow coerce people into accepting that substance. It does this by instituting what are known as ?legal tender,? a.k.a. ?forced tender? laws. These laws compel people to accept for all debts whatever the legal tender is, e.g., Federal Reserve ?Notes.?
The question that should be put to those who propound these legal tender laws is:
If the money is good, and would be preferred by the people, then why are legal tender laws necessary? If the money is not good, then why in a democracy should people be forced to accept it?
Professor Mundell confirmed that, in his view, our money is as overvalued as one can imagine. What is left unsaid is that, by forcing people to accept money that is overvalued, someone gains and someone loses. Clearly, those being forced, whether they understand they are being forced or not, are the losers. Otherwise they wouldn?t have to be forced.
By definition, they are trading goods and services that are worth more than the ?overvalued? paper money. The winners are those who create the paper money?the banking system?and those who get fees for moving it around?the Wall Street community. The essence of legal tender laws is wealth transfer from ordinary people to the financial community. It is simply not fair.
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