May 8, 2017    6 minute read

Remembering the Copernicus Law: Why Today’s Monetary Policy Puts the World at Risk

From Metal to Fiat    May 8, 2017    6 minute read

Remembering the Copernicus Law: Why Today’s Monetary Policy Puts the World at Risk

Nicolaus Copernicus, the astronomer, mathematician, cleric and doctor, was famous for his work on the heliocentric theory in astronomy, expounded in  “On the Revolutions of the Heavenly Spheres”. But what are his achievements in the sphere of economic thought? And why are they so important nowadays?

He coined the monetary principle that “bad money drives out good”, known either as the Copernicus Law, or Gresham’s law.

In the second half of the 15th and the first half of the 16th century, Europe – including Poland, where Copernicus lived – was experiencing an economic boom. Mass discovery of metal ores, increasing agricultural productivity and the development of crafts and trade all contributed to accelerating the growth of the Old Continent.

International trade, due to the growing market in interest loans (usury) led to the creation of great wealth. Soon the surplus of capital encouraged many to make investments. Artisans became more dependent on capital owners, in a sense losing their economic independence, and crafts and guilds were created.

Money slowly became capital – it served not only as a means of payment in trade between people and countries but also as a means of making financial investment. Monetary issues were gaining fundamental importance in the economic affairs of the world at that time.

Early Economists

Although economics as a science did not yet exist, economic studies were being developed, and discussions were ongoing between nominalist and scholastic scholars on the issue of money.

Copernicus, as a long-term administrator of the Chapter of Warmia, had direct contact with economic issues. Observing the phenomenon of “bad” (debased) coinage and rising prices, he felt the effects of these processes when the value of rents paid by peasants from the vast wealth of the Chapter lost their value. As a politician, he participated in the provincial parliament of the Prussian parliament, was interested in economic life, and was aware of the threat that coin debasement posed to international trade.

Under such conditions, in 1526 Copernicus wrote “On the Minting of Coin”. For the first time, Copernicus explained the reason for the decline in the value of money as a result of over-adding copper to the production of gold and silver coins. He analysed broadly the decline in the value of the Prussian coin, referring to the role of a ‘good coin’ in Teutonic times, which systematically worsened since the first half of the 15th century.

The new work was also about the price ratio (value) of silver and gold coins, which he thought should be identical to the price of pure silver and gold. Copernicus dealt in detail with the effects of the money debasement. Prices of gold and silver, wages of workers and craftsmen went up. So he was dealing with the phenomenon known today as inflation.

The Gresham-Copernicus Law

Copernicus believed that it was beneficial for peasants and farmers to be paying fixed rents, because the real value of the rent decreased with inflation. Also, those who beat the coin would profit from it, as well as merchants and craftsmen who lost nothing because their goods were sold according to the value of gold.

A debased money is harmful to all living from a steady income. In addition, it leads to insufficient and persistent inactivity among citizens. When over-burdening certain social groups like landowners and the poorest people, commerce and entrepreneurship is stifled, leading to falling production. As a consequence, revenue to the state treasury is reduced, which in turn leads to the reduction of state expenditures. Therefore, art and science are neglected. Only in countries where there is a “healthy” (based) coin do works of art and teaching flourish, according to the author.

Copernicus formulated the principle known in modern economics as Gresham’s law, which states that only ‘good coins’ should be in circulation. If good and bad coins are circulated, good ones ‘run away’, pushed out by worse money with a lower content of valuable metals. Better coins end up shipped abroad. With this statement Copernicus is aligned with metallism.

Copernicus was sometimes recognised as a precursor of the quantity theory of money. The value of all things (and hence also gold and silver) in coin terms would rise or fall depending on the quality of the coinage, that is, depending on the amount of pure ore contained in the coin, on which the coin depends.

Clutching at Straws

Knowledge of the state of the economy and its perspectives is shaped by recognised authorities. One often has the opportunity to familiarise oneself with often contradictory points of views – but it’s relatively rare that a reader can follow all of the market-oriented practitioners’ opinions.

Governments and central banks have lost their ammunition. In desperate attempts to save the global financial system, they manipulated every financial market and instrument possible. They print money, set false interest rates, buy their own debt, artificially maintain the stock market, and sell gold reserves on the market.

All these actions and misleading manipulations create only large bubbles, which will ultimately lead to total implosion of the financial system, stock market crash, bonds and real estate.

The European banking system is on its way to bankruptcy. Also many American banks like Bank of America and Citigroup have similar symptoms. The coming months will be characterised by extreme volatility and could have a devastating effect on the financial system.

Living in the Clouds

The problem is that no one is prepared for the upcoming shock. The world still believes in a perfect state, created 100 years ago, in which central banks can last forever. Meanwhile, the accumulated privileges of the few have created an unreal world. Most normal people in the West believe that they are still doing well, not realising that their high standard of living is built on government debt and deficits, and also on increasing private debt.

But before the current financial system reaches its end, printing money on a scale that the world has not seen before is a useless attempt to save the failing banks. Of course, it is not the global financial system that requires support. Budget revenues shrink and more money is needed to print. Remember that Japan already covers 50% of its budgetary expenses with reprints.

Throughout history, gold (and sometimes silver) has long been the only money that could survive. Every paper money or fiat currency has been ruined by governments, spending on deficits and printing money. In the past 100 years, all major currencies have depreciated by 97-99% in relation to gold. When it comes to wealth maintenance, it is arguably essential to possess some gold or silver, paying tribute to the Copernicus law.

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