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The Purchasing Power of Money; Fisher, Irving
11 paragraphs found.
Chapter 7

One of the first difficulties in the early history of money was that of keeping two (or more) metals in circulation. One of the two would become cheaper than the other, and the cheaper would drive out the dearer. This tendency was observed by Nicolas Oresme, afterwards Count Bishop of Lisieux, in a report to Charles V of France, about 1366, and by Copernicus about 1526 in a report or treatise written for Sigismund I, King of Poland. *66 Macleod in his Elements of Political Economy, published in 1857, *67 before he had become aware of the earlier formulations of Oresme and Copernicus, *68 gave the name "Gresham's Law" to this tendency, in honor of Sir Thomas Gresham, who stated the principle in the middle of the sixteenth century. The tendency seems in fact, to have been recognized even among the ancient Greeks, being mentioned in the "Frogs" of Aristophanes: *69

"For your old and standard pieces valued and approved and tried, Here among the Grecian nations and in all the world beside, Recognized in every realm for trusty stamp and pure assay, Are rejected and abandoned for the trash of yesterday, For a vile, adulterate issue, drossy, counterfeit, and base Which the traffic of the City passes current in their place."

Gresham's or Oresme's Law is ordinarily stated in the form, "Bad money drives out good money," for it was usually observed that the badly worn, defaced, light-weight, "clipped," "sweated," and otherwise deteriorated money tended to drive out the full-weight, freshly minted coins. This formulation, however, is not accurate. It is not true that "bad" coins, e.g. worn, bent, defaced, or even clipped coins, will drive out other money just because of their worn, bent, defaced, or clipped condition. Accurately stated, the Law is simply this: Cheap money will drive out dear money. The reason the cheaper of two moneys always prevails is that the choice of the use of money rests chiefly with the man who gives it in exchange, not with the man who receives it. When any one has the choice of paying his debts in either of two moneys, motives of economy will prompt him to use the cheaper. If the initiative and choice lay principally with the person who receives, instead of the person who pays the money, the opposite would hold true. The dearer or "good" money would then drive out the cheaper or "bad" money.


The better money might conceivably be used in exchange at a premium, i.e. at its bullion value; but the difficulties of arranging payments in it, which would be satisfactory to both parties, are such that in practice it is never so used in large quantities. In fact, the force of Gresham's Law is so great that it will even sacrifice the convenience of a whole nation. For instance, in Italy fifteen years ago the overissue of paper money drove not only gold across the Alps, but also silver and copper. These could circulate in Southern France at a par with corresponding coins there because France and Italy belonged to the Latin Union. Consequently, for a time there was very little small change left, below the denomination of 5 lire notes. Customers at retail stores often found it impossible to make their purchases because they lacked the small denominations necessary, and because the storekeeper lacked the same small denominations, and could not make change. To meet the difficulty, 30,000,000 of 1 lire notes were issued, and these were so much in demand that dealers paid a premium for them.


Gresham's Law applies not only to two rival moneys of the same metal; it applies to all moneys that circulate concurrently. Until "milling" the edges of coins was invented and a "limit of tolerance" of the mint (deviation from the standard weight) was adopted, much embarrassment was felt in commerce from the fact that the clipping and debasing of coin was a common practice. Nowadays, however, any coin which has been so "sweated" or clipped as to reduce its weight appreciably ceases to be legal tender, and being commonly rejected by those to whom it is offered ceases to be money. Within the customary *70 or legal limits of tolerance, however—that is, as long as the cheaper money retains the "money" power—it will drive out the dearer.


The obvious effect of Gresham's Law is to decrease the purchasing power of money at every opportunity. The history of the world's currencies is largely a record of money debasements, often at the behest of the sovereign. Our chief purpose now, in considering Gresham's Law, is to formulate more fully the causes determining the purchasing power of money under monetary systems subject to the operation of Gresham's Law. The first application is to bimetallism.


The waters representing gold and silver money are separated by a movable film f. In Figure 6 a this film is at the extreme right; in Figure 6 b, at the extreme left; in Figure 7 a, again at the right; and in Figure 7 b, midway.

Figure. Click to enlarge in new window.

The a figures represent conditions before the mints are opened to silver. The b figures represent conditions after they have been opened and Gresham's Law has operated. If, just previous to the introduction of bimetallism, the silver level in S b is below the gold level in G b the statute introducing bimetallism will be inoperative, i.e. the silver bullion will not flow uphill, as it were, into the money reservoir; but if, as in Figure 6 a or in 7 a, the silver level is higher, then as soon as the mints are open to silver, it will flow into circulation. Being at first cheaper than gold, it will push out the gold money through the left tube ( i.e. by melting) into the bullion market. This expulsion of gold may be complete, as shown in Figure 6 b, or only partial, as shown in Figure 7 b. The expulsion will continue just as long as there is a premium on gold; that is, as long as the silver level in the bullion reservoir is above the gold level in the money reservoir; i.e. as long as silver bullion is cheaper than gold money.


Let mm, as shown in Figure 6 a, be the mean level; that is, a level such that the volume x above it equals the combined vacant volumes y and z below it. This line, mm, remains the mean level, whatever may be the distribution of the contents among the three reservoirs. As soon as the connecting pipe is inserted, silver will flow into the money reservoir and, in accordance with Gresham's Law, will displace gold.


So long as the quantity of silver or other token money, e.g. paper money, is too small to displace gold completely, gold will continue in circulation. The value of the other money in this case cannot fall below that of gold. For if it should, it would, by Gresham's Law, displace gold, which we have supposed it is not of sufficient quantity to do. The parity between silver coin and gold under the "limping" standard is, therefore, not necessarily dependent on any redeemability in gold, but may result merely from limitation in the amount of silver coin. Such limitation is usually sufficient to maintain parity despite irredeemability. This is not always true, however; for if the people should lose confidence in some form of irredeemable paper or token money, even though it were not overissued, it would depreciate and be nearly as cheap in money form as it is in the raw state. A man is willing to accept money at its face value so long as he has confidence that every one else is ready to do the same. But it is possible, for instance, for a mere fear of overissue to destroy this confidence. The payee, who, under ordinary circumstances, submits patiently to whatever money is customary or legal tender, may then take a hand and insist on "contracting out" of the offending standard. *80 That is, he may insist on making all his future contracts in terms of the better metal,—gold, for instance,—and thus contribute to the further downfall of the depreciated paper.


Influenced partly by the desire to bring gold back into circulation, and partly also, perhaps, by the supposed discoveries of gold in the South, Congress passed acts in 1834 and 1837 establishing the ratio of "16 to 1,"—or, more exactly, 16.002 to 1 in 1834 and 15.998 to 1 in 1837. Whereas silver money had been over-valued by the previous laws, by these new laws gold was overvalued. That is, the commercial ratio continued to be near 15½ to 1, while the monetary ratio was slightly greater. This remained the case up to 1850; consequently, in accordance with Gresham's Law, gold money, now the cheaper, drove out silver money, and the United States became a gold-standard country. In 1853, to prevent the exportation of our subsidiary silver coins, their weight was reduced.


The United States continued to be a gold-using country until the period of the Civil War, during which "greenbacks," or United States notes, were issued in considerable excess. Again Gresham's Law came into operation. Gold was in turn driven from the currency, and the United States came to a paper standard. *91 For some years after the close of the war the country remained on a paper standard, little gold being in circulation except on the Pacific coast, and not much silver anywhere.

Appendix to Chapter VII
Substitutes merely in the sense of Gresham's Law that the cheaper will be substituted for the dearer. It does not deny that the metals are differently preferred for different monetary uses. We cannot compare gold and silver to independent commodities as "copper and wheat," or "beef and shoes," but only to some other pair of substitutes, or quasi substitutes, such as iron and steel, cotton and wool, oats and maize, molasses and sorghum, cane and beet-root sugar, India and Dakota wheat.

Notes for Appendix to Chapter VIII

Money and the Mechanism of Exchange; Jevons, William Stanley
10 paragraphs found.
Chapter VII. Coins

Though I must always deeply respect the opinions of so profound a thinker as Mr. Spencer, I hold that in this instance he has pushed a general principle into an exceptional case, where it quite fails. He has overlooked the important law of Gresham (to be explained in the next chapter), that better money cannot drive out worse. In matters of currency self-interest acts in the opposite direction to what it does in other affairs, as will be explained, and if coining were left free, those who sold light coins at reduced prices would drive the best trade.

Chapter VIII. The Principles of Circulation

Gresham's Law.


From these considerations we readily learn the truth and importance of a general law or principle concerning the circulation of money, which Mr. Macleod has very appropriately named the Law or Theorem of Gresham, after Sir Thomas Gresham, who clearly perceived its truth three centuries ago. This law, briefly expressed, is that bad money drives out good money, but that good money cannot drive out bad money. At first sight there may seem to be something paradoxical in the fact, that when beautiful new coins of full weight are issued from the mint, the people still continue to circulate, in preference, the old depreciated ones. Many well-intentioned efforts to reform a currency have thus been frustrated, to the great cost of states, and the perplexity of statesmen who had not studied the principles of monetary science.


Gresham's law alone furnishes a sufficient refutation of Mr. Herbert Spencer's doctrine, already noticed (p. 64) that money ought to be provided by private manufacturers. People who want furniture, or books, or clothes, may be trusted to select the best which they can afford, because they are going to keep and use these articles; but with money it is just the opposite. Money is made to go. They want coin, not to keep it in their own pockets, but to pass it off into their neighbour's pockets; and the worse the money which they can get their neighbours to accept, the greater the profit to themselves. Thus there is a natural tendency to the depreciation of the metallic currency, which can only be prevented by the constant supervision of the state.


From Gresham's law we may infer the necessity of two precautions in the regulation of the currency. In the first place, the standard coins, as issued from the mint, should be as nearly as possible of the standard weight, otherwise the difference will form a profit for the bullion-broker and exporter. In the second place, adequate measures must be taken for withdrawing from circulation all coins which are worn below the least legal weight, otherwise they will continue to circulate as token coins for an indefinite length of time. All commerce consists in the exchange of commodities of equal value, and the principal money should consist of pieces of metal so nearly equal in metallic contents, that all persons, including bullion dealers, bankers, and other professed dealers in money, will indifferently substitute one coin for another. But it is obvious that these remarks do not apply to coins intended to serve as tokens, since the current value of tokens exceeds their metallic value, and every one who uses them otherwise than in ordinary circulation will lose the difference. Hence the weight of a token coin is comparatively a matter of indifference, so long as people will receive them, and the deficiency of weight is not too great a temptation to the false coiner.

Extension of Gresham's Law.


Gresham's remarks concerning the inability of good money to drive out bad money, only referred to moneys of one kind of metal, but the same principle applies to the relations of all kinds of money, in the same circulation. Gold compared with silver, or silver with copper, or paper compared with gold, are subject to the same law that the relatively cheaper medium of exchange will be retained in circulation and the relatively dearer will disappear. The most extreme instance which has ever occurred was in the case of the Japanese currency. At the time of the treaty of 1858, between Great Britain, the United States, and Japan, which partially opened up the last country to European traders, a very curious system of currency existed in Japan. The most valuable Japanese coin was the kobang, consisting of a thin oval disc of gold about 2 inches long, and 1¼ inch wide, weighing 200 grains, and ornamented in a very primitive manner. It was passing current in the towns of Japan for four silver itzebus, but was worth in English money about 18 s. 5 d., whereas the silver itzebu was equal only to about 1 s. 4 d. Thus the Japanese were estimating their gold money at only about one-third of its value, as estimated according to the relative values of the metals in other parts of the world. The earliest European traders enjoyed a rare opportunity for making profit. By buying up the kobangs at the native rating they trebled their money, until the natives, perceiving what was being done, withdrew from circulation the remainder of the gold. A complete reform of the Japanese currency is now being carried out, the English mint at Hong Kong having been purchased by the Japanese government.

Chapter IX. Systems of Metallic Money

In the early part of the last century a great deal of discussion took place upon the unsatisfactory state of the silver currency, and Sir Isaac Newton, the Master of the Mint, was requested to report upon the best measures to be adopted. In 1717 he made a celebrated report, recommending that the government should revert to the practice of fixing the price of the guinea, and he suggested 21 s. as the best rate. His advice being accepted, the guinea has ever since been valued at 21 s. Then there was again a double standard in England, any one being at liberty to pay in either kind of coin. In practice, however, it is almost impossible that the commercial value of the metals should coincide with the legal ratio. At the rate adopted by Sir Isaac Newton, gold was overvalued by rather more than 1½ per cent.; to that extent it was more valuable as currency than as metal. Therefore, in accordance with the Law of Gresham, and the principles laid down in Chapter VIII., the full weight silver coin was withdrawn or exported, and gold became the practical measure of value, which it has ever since continued to be.

Chapter X. The English System of Metallic Currency

In 1869 I ascertained, by a careful and extensive inquiry, that 31½ per cent. of the sovereigns and nearly one-half of the ten-shilling pieces were then below the legal limit. The reader who has attended to the remarks on Gresham's Law (p. 80), will see that no amount of coinage of new gold will drive out of circulation these depreciated old coins, because those who export, or melt, or otherwise treat the coins as bullion, will take care to operate upon good new ones.

Chapter XIV. International Money

There are, no doubt, certain evils which might possibly arise from the circulation of money between nation and nation. One government, for instance, might coin money slightly inferior to the proper standard, and such money, once introduced, would, in virtue of Gresham's law, be difficult to dislodge. The French mint has been in fault in this respect. French gold coin, when carefully assayed, is found to have a fineness of 898 or 899 parts in 1000, instead of 900 parts. There is, indeed, a mint remedy of two parts, so that the coin was legally issued; yet the mint authorities have taken advantage of this remedy in an improper way. On the average, the coins issued by any mint ought to have almost the exact standard fineness, and the divergence allowed under the name of remedy is only intended to cover accidental faults of workmanship in particular coins, and not an intentional average divergence from the standard.

The History of Bimetallism in the United States; Laughlin, J. Laurence
18 paragraphs found.
Preface to the Fourth Edition
"Whilst each of the two metals was equally a legal tender for debts of any amount, we were subject to a constant change in the principal standard measure of value. It would sometimes be gold, sometimes silver, depending entirely on the variations in the relative value of the two metals; and, at such times, the metal which was not the standard would be melted and withdrawn from circulation, as its value would be greater in bullion than in coin."

ARISTOPHANES, "Frogs," 891-898, Frere's Translation.
"Oftentimes have we reflected on a similar abuse
In the choice of men for office, and of coins for common use;
For your old and standard pieces, valued and approved and tried,
Here among the Grecian nations, and in all the world beside,
Recognized in every realm for trusty stamp and pure assay,
Are rejected and abandoned for the trash of yesterday;
For a vile, adulterate issue, drossy, counterfeit and base,
Which the traffic of the city passes current in their place!"


To M. M. L.

Preface to the Fourth Edition


Fourth Edition, with New Appendices,
A Study on the Fall of Silver Since 1885, and the Experience of the United States with Silver Since 1878

In the second edition, published in 1888, additions were made to the appendices; but no revision of the body of the text was made until 1896.

Part I, Chapter II, The Silver Period, 1792-1834


178014.72: 114.30: 1
*25brace bracket178114.78: 113.70: 1
178214.42: 113.42: 1
178314.48: 113.66: 1
178414.70: 114.77: 1
178514.92: 115.07: 1
178614.96: 114.76: 1
178714.92: 114.70: 1
178814.65: 114.58: 1
178914.75: 114.76: 1
179015.04: 114.88: 1
179115.05: 114.82: 1
179215.17: 114.30: 1
179315.00: 114.88: 1
179415.37: 115.18: 1
179515.55: 114.64: 1
179615.65: 114.64: 1
179815.59: 115.31:1
179915.74: 114.14: 1
180015.68: 114.68: 1

The movement of silver relatively to gold, as shown by these tables, may be best seen in Chart I. A downward tendency in the value of silver relatively to gold, beginning soon after 1780, is the marked characteristic of this period. The horizontal line drawn across the chart indicates the place of the ratio of 15:1 proposed by Hamilton, and it can be seen by comparison with this line whether the market ratios corresponded with 1:15. The line based on the Hamburg quotations shows that the market ratios remained at about the line of 1:15 in the years from 1790 to 1793, the very time during which our system was established; but it will be noticed at once that, after 1793, silver began a steady fall relatively to gold, and never thereafter in this period did it return to the ratio of 1:15. It was a very short time, indeed, that the ratio of "the commercial world" remained near Hamilton's choice. Of this gradual tendency of silver to change its value relatively to gold Hamilton, of course, did not know. Had he known of it, he must have foreseen the subsequent action of Gresham's law (by which the cheaper metal drives out the dearer), and the establishment of a single silver standard, instead of the single gold standard which he preferred. Without knowing it, he was dealing with a metal even then shifting in value; and, without intending it, he established a ratio which could accord with the market rate for only a very inconsiderable time. Hamilton's attempt was like that of a man who should try to build a house on the banks of the great glaciers in the Alps, which slowly but constantly move onward within their mountain channels, and who should yet expect to maintain fixed and unchanged relations in his house with the surface of the moving ice.

Chart I. Click to enlarge in new window.

It was also enacted (Sec. 14) that "it shall be lawful for any person or persons to bring to the said Mint gold and silver bullion, in order to their being coined." These words contain the important privilege known as "Free Coinage," by which is meant the right of any private person to have bullion coined at the legal rates. If the Government reserves to itself this right, there would not be free coinage. This is a matter of importance, because through it alone can Gresham's law have an immediate effect. If there is a profit in sending one of two legal metals to the Mint, and in withdrawing the other, with the result of displacing one of the metals in circulation with another, it is necessary, of course, that access to the Mint should be free to any one who sees this chance of profit.


Without stopping now to consider the cause of this change in the relations of gold and silver, it will be best to explain the effects of this change—no matter what its cause—upon the coinage of the United States. The situation now resembles that of a man who, having balanced a lever on a fulcrum, and then, after leaving lengthened one arm and shortened the other, should expect the lever to balance on the fulcrum in the same manner as before. We now have an illustration of Gresham's law—that when two metals are both legal tender, the cheaper one will drive the dearer out of circulation. This can not operate, however, unless there is "free coinage," and unless there is such a divergence between the mint and the market ratios of gold and silver as will secure to the money-brokers a profit by exchanging one kind of coins for the other. But, as we have already seen, "free coinage" existed, and a profitable difference *32 between the mint and the market ratios in the United States appeared about as early as 1810.


The operation of Gresham's law is in reality a very simple matter. If farmers found that in the same village eggs were purchased at a higher price in one of two shops than in the other, it would not be long before they all carried their baskets to the first shop. Likewise, in regard to gold or silver, the possessor of either metal has two places where he can dispose of it—the United States Mint, and the bullion market; he can either have it coined and receive in new coins the legal equivalent for it, or sell it as a commodity at a given price per ounce. If he finds that silver in the form of United States coins buys more gold than he could purchase with the same amount of silver in the bullion market, he sends his silver to the Mint rather than to the bullion market. By reference to Chart I, it will be seen that the market value of silver relatively to gold had fallen to 1:16, while at the Mint the ratio was 1:15. That is, in the market it required sixteen ounces of silver to buy one ounce of gold bullion; but at the Mint the Government received fifteen ounces of silver, and coined it into silver coins which were legally equivalent to one ounce of gold. The possessor of silver thus found an inducement of one ounce of silver to sell his silver to the Mint for coins, rather than in the market for bullion. But as yet the possessor of silver had only got silver coins from the Mint. How was he to realize his gain? Will people give the more valuable gold for his less valuable silver coins? To some minds there is a difficulty in understanding how a cheaper dollar is actually exchanged for a dearer dollar. This also is simple. The mass of people do not follow the market values of gold and silver bullion, nor calculate arithmetically when a profit can be made by buying up this or that coin. The general public know little about such things, and if they did, a little arithmetic would deter them. These matters are relegated by common consent to the money-brokers, a class of men who, above all others, know the value of a small fraction and the gain to be derived from it. Ordinary persons hand out gold or silver, when they are in concurrent circulation, under the supposition that the intrinsic value of gold is just equal to the intrinsic value of silver in the coins, according to the legal ratio expressed in the coins. If, under such conditions, silver falls as above described, the money-broker will continue to present silver bullion at the Mint, and the silver coins he receives he can exchange for gold coins as long as gold coins remain in common circulation—that is, as long as gold coins are not withdrawn by every one from circulation. Having now received an ounce of gold in coin for his fifteen ounces of silver coin, he can at once sell the gold as bullion (most probably melting it, or selling it to exporters) for sixteen ounces of silver bullion. He retains one ounce of silver as profit, and with the remaining fifteen ounces of silver goes to the Mint for more silver coins, exchanges these for more gold coins, sells the gold as bullion again for silver, and continues this round until gold coins have disappeared from circulation. When every one begins to find out that a gold eagle will buy more of silver bullion than it will of silver dollars in current exchanges, then the gold eagle will be converted into bullion and cease to pass from hand to hand as coin. The existence of a profit in selling gold coins as bullion, and presenting silver to be coined at the Mint, is due to the divergence of the market from the legal ratio, and no power *33 of the Government can prevent one metal from going out of circulation. Like the farmers with their eggs, under the operation of Gresham's law silver will be taken where it is of the most value (the United States Mint), and gold will be sold *34 where it brings a greater value than as coin (the bullion market).


In the preceding explanation of Gresham's law I have described the process which began to make itself felt as early as about 1810. The date itself is of importance, because some writers have explained the operation of Gresham's law and the disappearance of gold by causes *35 which can be admitted as the true ones only if the date were as late as 1819, the year when the English Resumption Act was passed. There are, however, indisputable proofs that the change in the relations of the two metals was apparent long before 1819, and, consequently, long before the English demand could have been felt. Mr. Lowndes introduced the question of the disappearance of gold from the currency by a resolution *36 in the lower house of Congress as early as November 27, 1818. Benton *37 distinctly sets an earlier date by stating that "it was not until the lapse of near twenty years after the adoption of the erroneous standard of 1792 that the circulation of that metal [gold], both foreign and domestic, became completely and totally extinguished in the United States." This would fix the time at about 1812. This is corroborated by Crawford, *38 Secretary of the Treasury, who asserts that a change in the relative values had taken place many years before 1820. When we recall that such a process as the substitution of one metal by another must be comparatively slow, especially in a new and sparsely settled country, the causes must have been at work some time before, if we read in a report to Congress in 1821: "On inquiry, they find that gold coins, both foreign and of the United States, have, in a great measure, disappeared." *39 It seems, therefore, to be clear that gold began to disappear as early as 1810, if not before, and that little of it was in circulation by 1818. *40 Indeed, since 1793 there existed in the relative values of gold and silver a strong reason why gold should not circulate in the United States, and why Mr. Lowndes should have said *41 in 1819: "It can scarcely be considered as having formed a material part of our money circulation for the last twenty-six years. In fact, the situation has been thus distinctly described: *42

"Our national gold coins were seldom if ever used as currency. Silver, which, by the act of 1792, rated quite as high as its commercial value, was the only national coin much used by our citizens. On our Northwestern and Southern frontiers, and in some Atlantic cities, foreigners occasionally scattered foreign gold coins. But these did not form any considerable portion of the circulating medium, except perhaps at the Southwest. As they were valued by weight, their circulation was highly inconvenient and often the subject of imposition. Their value was constantly fluctuating, according to the rates of exchange on Europe, where they were a legal tender in payment of balances due from us."

These conclusions are fortified by the returns of gold and silver coinage at the United States Mint. In the exposition of Gresham's law it was explained that the metal which had fallen in value would be presented at the Mint to be coined, while the dearer metal would go into the melting-pot, or be exported. Inasmuch as silver had fallen in value relatively to gold, it was to be expected that, to some extent, even in a new community where specie was scarce, silver would be brought to the Mint in preference to gold. And this is what we find to be the fact. After 1805 the coinage of silver distinctly increased, without an increase of gold coinage, while soon after the war of 1812 the coinage of gold almost entirely ceased, but the issue of silver coins steadily multiplied during the remainder of this period. This can be most easily seen in Chart II. The length of the dark lines away from the perpendicular line shows the value of gold coined (estimated in dollars) each year, *44 while the open lines, extending in an opposite direction, show the same for silver. *45 So distinct a change in the relative amounts of gold and silver coinage since 1805 is in itself cumulative proof that there was such a variation of the market from the Mint ratio as to send silver to the Mint for coinage in preference to gold as early as 1806. And this, too, although American dollar pieces ceased to be sent out from the Mint after 1805, and were not coined from that time to 1836. The mass of silver coins issued were in the form of half-dollars, which contained proportionally the same weight of silver as the dollar piece.

Chart II. Click to enlarge in new window.

In summing up, we find that, in fact, the ratio of 1:15 was in accordance with the market ratio at the time of the establishment of the Mint in 1792, but that Hamilton was attempting to set up the new system on the slope of a declining value of silver relatively to gold; and that this downward movement was unknown to the statesmen of that day. The divergence of the market from the Mint ratio brought Gresham's law into operation as early as the period from 1805 to 1810, and before 1820 it had virtually driven gold out of use as a medium of exchange.

Part I, Chapter IV, Change of the Legal Ratio by the Act of 1834

The effects of the undervaluation of silver, and the overvaluation of gold, in the legal ratio of 1:16, as compared with a market ratio of 1:15.7, were soon manifest. Gresham's law was brought into play, but its operation in this period was exactly the reverse of that in the preceding period (1792-1834). In the latter, the depreciated silver drove out gold; in the former, the overvalued gold began to drive out silver. It is evident that there would be a gain in putting gold into the form of coin, instead of, as heretofore, regarding it as merchandise. A man could buy for $15,700 an amount of gold bullion, which, when coined for its owner at the United States Mint, possessed a legal tender coin value of $16,000. A debtor, therefore, would gain $300 by paying his creditor in gold, the overvalued metal. And as there was such a premium on the use of gold, so there was a corresponding premium on the disuse of silver. If a debtor had $16,000 of silver coin, he need take of it only $15,700, melt it into bullion, and in the bullion market buy gold bullion, which, when coined at the Mint into gold coins, would have a debt-paying power of $16,000. There was a profit of $300 in not using silver as a medium of exchange, and in treating it as merchandise. The act was passed in June; and in the fall *40 of 1834 gold began to move toward the United States in such quantities that for a time some alarm was created in London as to the amount of reserves in the Bank of England. It then became very difficult to get silver *41 in the United States, and there began a displacement of silver by gold, irrespective of the issues of paper money, which at last culminated, when the discoveries of gold in 1848 had lowered the value of gold, in the entire disappearance of silver. It can not be said, then, that the act of 1834 was properly a part of a bimetallic scheme. For certainly we did not long enjoy the use of both metals in our circulation. The very process by which gold began to come in, carried silver out of use. *42 "It would probably be safe to assert that... one half of the citizens of our country, born since 1840, had never seen a United States silver dollar. If we should be mistaken in this; if it should be shown that one half of our people had seen a silver dollar some time in their lives, we could still fall back on the well-known historic fact that the dollar in question was rarely used as money after 1840." *43

Part I, Chapter V, The Gold Discoveries and the Act of 1853

§ 2. When the value of gold fell under the regular flow of a new and extraordinary supply, as might have been expected, Gresham's law began to work more actively than ever. It hias been seen already that the Mint ratio of 1:16 began in 1834 the movement which was slowly substituting gold for silver. The fall in the value of gold now aggravated this tendency into a serious evil. The divergence between the legal and the market ratios clearly revealed by 1849, at the latest, a long-standing error in regard to the subsidiary coinage. In 1804 an ounce of gold bought about 15.7 ounces of silver in the bullion market (but 16 ounces in the form of coin). In the period we are now considering, however, since gold had fallen in value, one ounce of gold could buy 15.7 ounces no longer, but a less number, which in 1853 was about 15.1 ounces. It will be seen at once that this widened the difference between the Mint ratio of 1:16 and the market ratio, and so offered a greater profit to the watchful money-brokers. Being able to make legal payment of a debt either in silver or gold, a man having 1,600 ounces of silver could tale only 1,540 of them to the bullion market, and there buy 100 ounces of gold, which would by law be a legal acquittal of his debt. He would thus gain 60 ounces by paying his debt in gold rather than in silver. When the ratio was 1:15.7, he would have gained only 30 ounces. So that the fall in the value of gold acted to increase the speed with which gold drove out silver.


But this went further than ever before. It will be recalled that the subsidiary coinage of silver had since 1792 contained weights of pure silver proportional to the weight of the dollar piece; that is, two halves, four quarters, ten dimes, and twenty half-dimes, contained as much pure silver as a dollar piece, or 371¼ grains. Consequently, if a dollar piece of silver had become worth 104 cents in gold, two halves, four quarters, etc., would have become worth the same sum in gold; therefore the profit in exchanging gold for subsidiary silver was such that it was also driven from use. A half-eagle exchanged for ten half-dollars gave the same profit as when exchanged for five separate dollar pieces. In this way all the silver used for small "change," the subsidiary coinage, disappeared from circulation. Through the operation of Gresham's law even the coins needed for small retail transactions had been reached, and the business of the country became seriously embarrassed by the want of small coins. *59 "We have had but a single standard for the last three or four years," said Mr. Dunham *60 in behalf of the Committee of Ways and Means in 1850; "that has been and now is gold." In short, by 1850 the people of the United States found themselves with a single standard of gold, but without enough silver to serve for necessary exchanges in retail transactions. The balancing plank in this vacillating system had now tipped quite in the other direction, for before 1834 the silver end was up. Now it was the gold end. How soon would it be the silver end again, if we adhered to such a system?

Part I, Chapter VI, The Gold Standard, 1853-1873

§ 2. The act of February 25, 1862, issued the first installment of United States legal-tender notes to the amount of $150,000,000. A similar amount was authorized by a second act passed July 11, 1862, but which was going through the preliminary stages of enactment in June. The result of the depreciation of the paper money which became manifest by a premium on gold in June to the extent of 5 per cent, and in July of 20 per cent, naturally brought Gresham's law into operation, by which the cheaper paper was substituted for the more valuable gold. Gold disappeared before the depreciating paper, and it was not until January 1, 1879, that it again appeared.


The subsidiary silver, containing 345.6 grains of pure metal, circulated at its face value in exchange for gold coins; but, if a 412½-grain dollar, containing 371.25 grains of pure silver, were counted as par, 345.6 grains of subsidiary coinage would be worth relatively, so far as regards the pure silver it contained, only 93.09 cents (although its legal value in small payments was 100 cents). The market valve of a dollar containing 371.25 grains, in 1862, however, was 104.16 cents of our gold coins. But, inasmuch as the subsidiary coins would be melted, or exported, only on estimates of their intrinsic value, the market price of 345.6 grains of silver would be 96.96 cents of our gold coins. Graph 1. Click to enlarge in new window.As soon, therefore, as the paper money depreciated below 96.96 cents, as compared with our gold coins, the movement of subsidiary silver out of circulation would begin. The operation can be easily seen by the adjoined diagram. As soon as the United States notes depreciated below 100, or par, there would be a profit in withdrawing our gold coins from use, according to Gresham's law. And when the depreciation had reached a point below 96.96, the silver coins must of necessity disappear. By June 1, 1862, the premium on gold was 5 per cent, which showed a depreciation of the United States notes to 95.23 cents in a dollar; by the 1st of July, the premium on gold was about 18 per cent, showing a depreciation to 84.7 cents in a dollar. In short, the subsidiary coins must have been withdrawn very soon after any effect on the gold coins was apparent. The paper money at 84.7 cents would very rapidly dislodge both kinds of coins.

Part II, Chapter VIII, The Production of Gold since 1850

If, then, it be true that men in trade have a greater desire for gold than for silver as money, this is the cause of a demand for gold; since demand is a desire for a commodity coupled with purchasing power. This desire for gold is the desire for it as a medium of exchange. *4 That is, if men of business are left to seek the metal they naturally prefer, gold will be chosen. Now, however, the law of a land, which fixes a legal-tender value of a given amount upon one or the other metal, can, through the operation of Gresham's law, bring into circulation the cheapest metal, whether the community has a preference for it or not. But whenever the state follows the wishes of its people, if it is a commercial state, it will be found that there is a very strong tendency among its population to the adoption of gold in preference to silver. In other words, although law can override popular wishes in this respect and decide that the cheapest metal shall be used, the natural forces governing demand still exist, and will, sooner or later, make themselves felt. It is quite unlikely, therefore, that there will be any falling off in the demand for gold for money uses. The only question, as all must admit, is rather, whether the supply will be sufficient or not. Law can create a demand for the metal, which would not naturally be chosen, only by overvaluing it in its legal ratio, and thus making it profitable to drive the preferred metal from use. The gain of the money-changer can be absolutely depended upon to bring this about. But if both metals were put upon an equal basis at the Mint—if such a thing is possible for any time—it will be found that gold is preferred in large payments and silver for small payments. The natural convenience of a trading population demands this. A comparison of the countries which use silver—China, India, and semi-civilized countries with the important commercial states—England, Germany, and the United States—which use gold, affords a striking illustration of this proposition.


§ 6. Now what was the effect upon the relative values of the two metals of suddenly doubling the quantity of gold, without anything like a proportional increase of silver? First of all, gold fell in value, both in regard to silver and to all commodities. The ratio between gold and silver, which had risen from 1:15 to 1:16, now showed the effect of the cheapening in gold by dropping to 1:15.3 for a time. This was the first effect. But a second effect soon became visible. The cheapened gold began to drive out silver from the currencies of the United States and Europe, because, at former ratios fixed before the gold discoveries, gold was overvalued at the mints, and so by Gresham's law came into circulation as the sole medium of exchange. But the matter worthy of most attention is that this exchange of gold for silver was seen and watched, not only without opposition, but even with satisfaction. Had there been a similar flow of silver into the place of gold, there would have been no such complacency. Here, again, is the preference for gold which we find so constantly present. The effect of this movement was, of course, to prevent gold from falling in value as much as it would otherwise have done; and to withdraw the previously existing demand from silver for use as a medium of exchange in Western commercial nations. The very cheapness and abundance of gold increased the demand for it for use as a medium of exchange, and ipso facto diminished the demand for silver. The world could choose between the two. There was silver enough; but, as soon as gold became plentiful, there was no doubt for a moment which metal was preferred. It was in the same spirit in which the modern world made choice between the railway and the stage-coach as a means of transportation. Wherever choice was possible, the best and most convenient means of locomotion was taken. The same idea has been expressed by Mr. Cairnes *6 in the following words:

"If anything unfits one commodity for measuring the value of another, it is the circumstance that they may both be applied to common purposes. No one would think of measuring the fluctuations in wheat by comparing it with oats, because, both grains being employed for the same or similar purposes, any change in the value of one is sure to extend to the other. When, e.g., the wheat crop is in excess while the oat crop is an average one, it always happens that a portion of the consumption, which in ordinary years falls upon oats, is thrown upon wheat, the effect of which is at once to check the fall in the price of the more abundant grain, while, by diminishing the need for the other, it causes it to participate in the decline. The influence of the increased abundance of one commodity is thus distributed over both, the fall in price being less intense in degree in proportion as it is wider in extent. Now this is precisely what is happening in the relations of gold and silver. The crop of gold has been unusually large; the increase in the supply has caused a fall in its value; the fall in its value has led to its being substituted for silver; a mass of silver has thus been disengaged from purposes which it was formerly employed to serve, and the result has been that both metals have fallen in value together, the depth of the fall being diminished as the surface over which it has taken place has been enlarged. The scene on which this interchange of gold and silver has hitherto been exhibited on the largest scale is the currency of France, in which, owing to the existence of a double standard,... one or the other metal is employed according as its worth in the markets of the world happens to vary in relation to its valuation at the French Mint."

§ 7. The first marked effect of the new gold on the currencies of Europe was seen in France, furnishing again a very striking illustration of Gresham's law.

Part II, Chapter XI, France and the Latin Union

Meanwhile France *47 and Italy had a higher standard for their coins than Switzerland, and as the neighboring states, which had the franc system of coinage in common, found each other's coins in circulation within their own limits, it was clear that the cheaper Swiss coins, according to Gresham's law, must drive out the dearer French and Italian coins, which contained more pure silver, but which passed current at the same nominal value. The Swiss coins of 800 thousandths fine began to pass the French frontier and to displace the French coins of a similar denomination; and the French coins were exported, melted, and recoined in Switzerland at a profit. This, of course, brought forth a decree in France (April 14, 1564) which prohibited the receipt of these Swiss coins at the public offices of France, the customs-offices, etc., and they were consequently refused in common trade among individuals.

Part III, Chapter XIV, Silver Legislation in 1878

Some astounding ignorance of monetary principles was, of course, exhibited. "It is said that if we authorize the coining of silver of 412½ grains to the dollar the effect will be to drive gold from the country. I deny *40 this utterly." The operation of Gresham's law was not even admitted, because, forsooth, silver was not an "inferior" currency. *41 A common fallacy, too, was that, if A owned silver bullion and had it coined at the Mint, where free coinage was allowed, a debtor B who owed a creditor C could thereby come into possession *42 of A's dollars by a miracle, and have as many dollars as he wanted. A wholesome reply to this was given *43 by Senator Bayard:

"It can not be that the laboring class are the debtor class. On the contrary, as I say, there is not a day in the year when the sun goes down when they are not the creditors of capital for the amount of their wages for that time.... So I say, considering the great fact that each man in the community sustains the relation of creditor as well as debtor, that if he can pay his debts in this depreciated money he will be paid himself in the same money, nothing can be made of it that I can understand, excepting that a class of people who, having purchased property at exaggerated prices and finding it now shrinking in value, may have an opportunity of scaling their debts to the injury, the injustice, of their creditors."
The Natural Law of Money; Brough, William
6 paragraphs found.
Chapter 1

A common and favorite method adopted by rulers to raise money was to abstract from the coinage a portion of its precious metal, and to substitute therefor a cheaper metal; when resistance was made to receiving such money, its circulation was enforced by mandate. This doubtless seemed to the rulers a ready road to wealth, but nothing could have been more destructive of the prosperity of their people, or of their own prosperity. A debased coinage seems to have entered into the experience of every civilized nation at some period of its history. Among the Romans, the pondo decreased to a half ounce of copper, in England the pound sterling to less than one-third of a pound of silver, and some coins in Scotland were reduced to less than one-sixtieth of their normal value. That the rulers have been chiefly responsible for this debasement will be seen when we come to consider the Gresham law.

Chapter 2

The mode of operation whereby, contrary to the law of natural displacement, an inferior money may expel a superior money from the circulation, is known as the Gresham law, and is so called because first expounded by Sir Thomas Gresham, who lived in the sixteenth century, and who was the founder of the Royal Exchange of London. The Gresham law would never have been heard of had coin passed by weight only, because in that case the recipient would have taken the coin only at the market value of the precious metal it contained; but when coin became king's money and people were required to accept it by tale at its face value, objection was made to pieces that did not contain the full complement of precious metal; as, however, the king's money was mandatory, it could not be refused so long as his imprint remained upon the coin. The fact that coin could not be refused—whether it contained the full complement of precious metal or not—was practically an invitation to every holder of a coin to abstract some metal from it before passing it, and this was practised to such an extent in England that in course of time, and by slow degrees, the whole coinage of the realm was reduced to about two-thirds of its standard weight and value.


Meantime, the law against clipping was vigorously enforced; counterfeiting had long been punished with the same extreme penalties as treason, and in the reign of Elizabeth the clipping of coin was also made a capital offence. Besides the clipped silver money, there were also in circulation at that time gold pieces issued in the reign of Henry VIII., which had been debased by that monarch to half their nominal value, and it is to this gold coin that Sir Thomas Gresham especially referred in expounding his law, which he did in a letter to Queen Elizabeth, written in the year 1558. Though he explained the practical working of the debased money, showing clearly how it drove the full-weight coin of Elizabeth from the circulation and from the country, he did not suspect the real cause of the evil, which was the mandatory character of the debased coin. He noted in this letter the disadvantage which the English merchants labored under in their exchanges with the continent—for it is in a foreign country that the coin of a nation must surely answer the test of bullion value. The superstitious awe that hedged a king in his own country had no influence upon the value of his coin when that coin went abroad; nor were the Jews, who were the principal dealers in money and bills of exchange, in the least misled by the king's image on the coin.


Money is identified with man as an individual, and not with man in mass; it is through the individual acting independently that it acquires all its potency. Moved by the incentive of gain, and for the gratification of his desires, the individual works only for himself and for those who come within the compass of his affections. It is by such delicate, complex, and hidden relationships to the individual that money becomes the circulating medium of a nation; and as the free circulation of the blood vivifies the body, so the unrestricted circulation of money vivifies the nation. If governments had limited their legislation to the simple requirements mentioned above, Sir Thomas Gresham would have had no occasion to expound the law that inverts the order of natural selection and drives money from circulation regardless of its efficiency; nor would we have any silver question to discuss; the two metals might then circulate as efficient money in one country at the same time; if one went out of use, it would be because it was no longer needed and could do better service in other occupations; the transition would be quiet and without disturbance to industry.

Chapter 4

The first issue of bills of credit was made by Massachusetts in 1690: it was not then known in England or in America why clipped coin should hold its place in the circulation, while coin of full weight could not; although this problem had been solved by Sir Thomas Gresham more than a hundred years before, its solution was not known to the colonists; it was therefore not to be expected that they should understand the workings of their paper-money. England, in common with monarchical Europe, had long before fallen into the way of looking at money as of the king's creation, and what England thought in reference to money, the colonists thought. The crown arrogated to itself the power to fix the value of money, and nobody questioned that power. In the years following the introduction of paper-money in the colonies, it came to be understood that metallic money was but a commodity with which the people were as competent to supply themselves as with any other commodity; but this knowledge was confined to the few, and even the few never understood the nature of paper-money. Nor is there any evidence that the law of metallic money was sufficiently assimilated by any one to enable him to perceive that it was beyond the power of the state to regulate the value of it, or that the assumption of such power by the state was not one of the legitimate prerogatives of sovereignty.

Chapter 7

It must be admitted that, at first sight, the idea of having one monetary standard rather than two is beguiling, but a little consideration will show that this idea proceeds directly from the monarchical conception of government, which is paternal, and which assumes that the people are not quite competent to manage their own affairs. It overlooks natural differences in money and ignores a fundamental law which requires that, for efficient service, money must be acceptable to the people using it, and adaptable to their occupations. If we would understand the nature of money, we must get rid of the idea that mysterious complexities are inherent in it; we must realize that it is but an implement of exchange, and no more sacred than the pound weight or the bushel measure. These complexities have so long obscured the real nature and function of money that they have come to be regarded by not a few as principles, whereas they are only obstructions to the progress of natural law. What is the Gresham law but a protest against artificial obstruction? If there had been no bi-metallism we should never have heard of a Gresham law; if there had been no legal-tender enactment we should never have heard either of bi-metallism or mono-metallism, and when the delusive idea of regulating the value of money by legal enactment shall be dismissed, we shall have heard the last of legal tender.

Human Action: A Treatise on Economics; Mises, Ludwig von
8 paragraphs found.
Part 3, Chapter XIII. Monetary calculation as a tool of action

The evolution of capitalist economic calculation was the necessary condition for the establishment of a systematic and logically coherent science of human action. Praxeology and economics have a definite place in the evolution of human history and in the process of scientific research. They could only emerge when acting man had succeeded in creating methods of thinking that made it possible to calculate his actions. The science of human action was at the beginning merely a discipline dealing with those actions which can be tested by monetary calculation. It dealt exclusively with what we may call the orbit of economics in the narrower sense, that is, with those actions which within a market society are transacted by the intermediary of money. The first steps on the way to its elaboration were odd investigations concerning currency, moneylending, and the prices of various goods. The knowledge conveyed by Gresham's Law, the first crude formulations of the quantity theory of money—such as those of Bodin and Davanzati—and the Law of Gregory King mark the first dawn of the cognition that regularity of phenomena and inevitable necessity prevail in the field of action. The first comprehensive system of economic theory, that brilliant achievement of the classical economists, was essentially a theory of calculated action. It drew implicitly the borderline between what is to be considered economic and what extra-economic along the line which separates action calculated in monetary terms from other action. Starting from this basis, the economists were bound to widen step by step the field of their studies until they finally developed a system dealing with all human choices, a general theory of action.

Part 4, Chapter XVII. Indirect exchange

At this point the government may interfere. It decrees that these pieces of credit money are legal tender at their face value. *90 Every creditor is bound to accept them in payment at their face value. No trader is free to discriminate against them. The decree tries to force the public to treat things of different exchange value as if they had the same exchange value. It interferes with the structure of prices as determined by the market. It fixes minimum prices for the credit money and maximum prices for the commodity money (gold) and foreign exchange. The result is not what the government aimed at. The difference in exchange value between credit money and gold does not disappear. As it is forbidden to employ the coins according to their market price, people no longer employ them in buying and selling and in paying debts. They keep them or they export them. The commodity money disappears from the domestic market. Bad money, says Gresham's Law, drives good money out of the country. It would be more correct to say that the money which the government's decree has undervalued disappears from the market and the money which the decree has overvalued remains.

It is furthermore immaterial whether or not the laws assign to the money-substitutes legal tender quality. If these things are really dealt with by people as money-substitutes and are therefore money-substitutes and equal in purchasing power to the respective amount of money, the only effect of the legal tender quality is to prevent malicious people from resorting to chicanery for the mere sake of annoying their fellow men. If, however, the things concerned are not money-substitutes and are traded at a discount below their face value, the assignment of legal tender quality is tantamount to an authoritarian price ceiling, the fixing of a maximum price for gold and foreign exchange and of a minimum price for the things which are no longer money-substitutes but either credit money or fiat money. Then the effects appear which Gresham's Law describes.
Part 6, Chapter XXX. Interference with the structure of prices

Cognizance of the issue involved was first reached with regard to a special problem. Various governments long practiced currency debasement. They substituted baser and cheaper metals for a part of the gold or silver which the coins previously contained, or they reduced the weight and the size of the coins. But they retained for the debased coins the customary names of the old ones and they decreed that they should be given and received at the nominal par. Then later the governments tried to enjoin on their subjects analogous constraint with regard to the exchange ratio between gold and silver and that between metallic money and credit money or fiat money. In searching for the causes which made all such decrees abortive, the forerunners of economic thought had already discovered by the last centuries of the Middle Ages the regularity which was later called Gresham's Law. There was still a long way to go from this isolated insight to the point where the philosophers of the eighteenth century became aware of the interconnectedness of all market phenomena.

Part 6, Chapter XXXI. Currency and credit manipulation

Mintage has long been a prerogative of the rulers of the country. However, this government activity had originally no objective other than the stamping and certifying of weights and measures. The authority's stamp placed upon a piece of metal was supposed to certify its weight and fineness. When later princes resorted to substituting baser and cheaper metals for a part of the precious metals while retaining the customary face and name of the coins, they did it furtively and in full awareness of the fact that they were engaged in a fraudulent attempt to cheat the public. As soon as people found out these artifices, the debased coins were dealt with at a discount as against the old better ones. The governments reacted by resorting to compulsion and coercion. They made it illegal to discriminate in trade and in the settlement of deferred payments between "good" money and "bad" money and decreed maximum prices in terms of "bad" money. However, the result obtained was not that which the governments aimed at. Their decrees failed to stop the process which adjusted commodity prices (in terms of the debased currency) to the actual state of the money relation. Moreover, the effects appeared which Gresham's Law describes.


In many countries the emergence of the gold standard was effected by the operation of Gresham's Law. The role that government policies played in this process in Great Britain consisted merely in ratifying the results brought about by the operation of Gresham's Law; it transformed a de facto state of affairs into a legal state. In other countries governments deliberately abandoned bimetallism just at the moment when the change in the market ratio between gold and silver would have brought about a substitution of a de facto silver currency for the then prevailing de facto gold currency. With all these nations the formal adoption of the gold standard required no other contribution on the part of the administration and the legislature than the enactment of laws.


A metallic currency is not subject to government manipulation. Of course, the government has the power to enact legal tender laws. But then the operation of Gresham's Law brings about results which may frustrate the aims sought by the government. Seen from this point of view, a metallic standard appears as an obstacle to all attempts to interfere with the market phenomena by monetary policies.


If a government fixes the parity of its domestic credit or flat money against gold or foreign exchange at a higher point than the market—that is, if it fixes maximum prices for gold and foreign exchange below the potential market price—the effects appear which Gresham's Law describes. A state of affairs results which—very inadequately—is called a scarcity of foreign exchange.

The Reason of Rules: Constitutional Political Economy; Brennan, Geoffrey and James M. Buchanan
3 paragraphs found.
Ch. 4, Modeling the Individual for Constitutional Analysis

VI. Gresham's Law in Politics


Hobbes might well be interpreted here as presenting a version of the risk-aversion argument similar to that elaborated in the previous section. But he might also be interpreted as claiming that there is what we would call a sort of Gresham's law in social interactions such that bad behavior drives out good and that all persons will be led themselves by the presence of even a few self-seekers to adopt self-interested behavior. *28


There is, finally, a quite different, non-Hobbesian sense in which something like Gresham's law may apply in social interactions. Lord Acton's famous dictum that power tends to corrupt, and absolute power corrupts absolutely was, no doubt, based on some predicted psychological destruction of the moral fiber of the despot. Such considerations are beyond our purview in this book, but there is a related, if quite different, point to be made. If institutions are such as to permit a selected number of persons to exercise discretionary powers over others, what sort of persons should be predicted to occupy these positions?

The Theory of Money and Credit; Mises, Ludwig von
5 paragraphs found.
Part I,Ch.4

This may be confirmed by a few historical examples. First, the impossibility of modifying the monetary system merely by the exercise of authority may be illustrated by the ill success of bimetallistic legislation. This was once thought to offer a simple solution of a big problem. For thousands of years, gold and silver had been employed side by side as commodity money; but the continuance of this practice had constantly grown more burdensome, for the parallel standard, or simultaneous employment as currency of two kinds of commodity, has many disadvantages. Since no spontaneous assistance was to be expected from the individuals engaged in business, the state decided to intervene in the hope of cutting the Gordian knot. Just as it had previously removed certain obvious difficulties by declaring that debts contracted in terms of thalers might be discharged by payment of twice as many half-thalers or four times as many quarter-thalers, so it now proceeded to establish a fixed ratio between the two different precious metals. Debts payable in silver, for instance, could be discharged by payment of 1 : 15½ times the same weight of gold. It was thought that this had solved the problem, while in fact the difficulties that it involved had not even been suspected; as events were to prove. All the results followed that are attributed by Gresham's law to the legislative equating of coins of unequal value. In all debt settlements and similar payments, only that money was used which the law rated more highly than the market. When the law had happened to hit upon the existing market ratio as its par, then this effect was delayed a little until the next movement in the prices of the precious metals. But it was bound to occur as soon as a difference arose between the legislative and the market ratios of the two kinds of money. The parallel standard was thus turned, not into a double standard, as the legislators had intended, but into an alternative standard.


The exaggeration of the importance in monetary policy of the power at the disposal of the state in its legislative capacity can only be attributed to superficial observation of the processes involved in the transition from commodity money to credit money. This transition has normally been achieved by means of a state declaration that inconvertible claims to money were as good means of payment as money itself. As a rule, it has not been the object of such a declaration to carry out a change of standard and substitute credit money for commodity money. In the great majority of cases, the state has taken such measures merely with certain fiscal ends in view. It has aimed to increase its own resources by the creation of credit money. In the pursuit of such a plan as this, the diminution of the money's purchasing power could hardly seem desirable. And yet it has always been this depreciation in value which, through the coming into play of Gresham's law, has caused the change of monetary standard. It would be quite out of harmony with the facts to assert that cash payments had ever been stopped; that is, that the permanent convertibility of the notes had been suspended, with the intention of effecting a transition to a credit standard. This result has always come to pass against the will of the state, not in accordance with it.

Part II,Ch.14

The confutation of this and related objections is implicit in the quantity theory and in Gresham's law. The quantity theory shows that money can never permanently flow abroad from a country in which only metallic money is used (the "purely metallic currency" of the currency principle). The tightness in the domestic market called forth by the efflux of part of the stock of money reduces the prices of commodities, and so restricts importation and encourages exportation, until there is once more enough money at home. The precious metals which perform the function of money are distributed among individuals, and consequently among separate countries, according to the extent and intensity of the demand of each for money. State intervention to assure to the community the necessary quantity of money by regulating its international movements is supererogatory. An undesired efflux of money can never be anything but a result of state intervention endowing money of different values with the same legal tender All that the state need do, and can do, in order to preserve the monetary system undisturbed, is to refrain from such intervention. That is the essence of the monetary theory of the Classical economists and their immediate successors, the Currency School. It is possible to refine and amplify this doctrine with the aid of the modern subjective theory; but it is impossible to overthrow it, and impossible to put anything else in its place. Those who are able to forget it only show that they are unable to think as economists.


When a country has substituted credit money or fiat money for metallic money because the legal equating of the overissued paper and the metallic money sets in motion the mechanism described by Gresham's law, it is often asserted that the balance of payments determines the rate of exchange. But this also is a quite inadequate explanation. The rate of exchange is determined by the purchasing power possessed by a unit of each kind of money; it must be determined at such a level that it makes no difference whether commodities are purchased directly with the one kind of money or indirectly, through money of the other kind. If the rate of exchange moves away from the position that is determined by the purchasing-power parity, which we call the natural or equilibrium rate, then certain sorts of transaction would become profitable. It would become lucrative to purchase commodities with the money that was undervalued by the rate of exchange as compared with the ratio given by its purchasing power, and to sell them for the money that was overvalued in the rate of exchange in comparison with its purchasing power And because there were such opportunities of profit, there would be a demand on the foreign-exchange market for the money that was undervalued by the exchanges and this would raise the rate of exchange until it attained its equilibrium position. Rates of exchange vary because the quantity of money varies and the prices of commodities vary. As has already been remarked, it is solely owing to market technique that this basic relationship is not actually expressed in the temporal sequence of events. In fact, the determination of foreign-exchange rates, under the influence of speculation, anticipates the expected variations in the prices of commodities.

Part IV,Ch.23

Once, in the past, Ruritania was on the gold standard. But the government issued little sheets of printed paper to which it assigned legal-tender power in the ratio of one paper rur to one gold rur. All residents of Ruritania were made to accept any amount of paper rurs as the equivalent of the same nominal amount of gold rurs. The government alone did not comply with the rule it had decreed. It did not convert paper rurs into gold rurs in accordance with the ratio 1 : 1. As it went on increasing the quantity of paper rurs, the effects resulted which Gresham's law describes. The gold rurs disappeared from the market. They were either hoarded by Ruritanians or sold abroad.

Studies in the Theory of International Trade; Viner, Jacob
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A Discourse of Trade; Barbon, Nicholas
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Cyclopædia of Political Science, Political Economy, and the Political History of the United States; Edited by: Lalor, John J.
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The Common Sense of Political Economy; Wicksteed, Philip H.
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Book II,Ch.7
This is only a particular case of the general phenomenon which is defined under "Gresham's law" as the tendency of bad money to drive out good. This is not really a special law affecting the currency. It is merely a special application of the general principle that if S 1 and S 2 are units of two specified commodities (in this case heavy and light sovereigns) which are equally capable of serving the purposes of A (who cannot indeed distinguish between them), whereas S 1 will serve certain purposes of B (who can distinguish between them) better than S 2 will, there will be a tendency, as they pass in exchange, for B to "secrete" the S 1's for his own special purposes and pass on the S 2's to A. Or in more general terms, if S 1 will serve some purposes as well as S 2 and other purposes better, there will be a tendency to assign S 1 to those purposes which it can serve better than S 2 rather than to those it can only serve as well. A light sovereign (within the limits of legal tender weight) will serve the purposes of the ordinary citizen as well as a heavy one, but the latter will serve the technical purposes of the jewellers best.
"The Application of the Theoretical Apparatus of Supply and Demand to Units of Currency"; Cannan, Edwin
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The Application of the Theoretical Apparatus of Supply and Demand to Units of Currency

Lovers of paradox might say that a currency may go out of use either because it is too cheap, or because it is too dear, but that is not the true conclusion of my argument. The true conclusion is that a continuance of rapid change in either direction will cause a currency to go out of use. This is perfectly reasonable, stability of value being one of the most important requisites of useful currency, and Gresham's law that bad money drives out good being fortunately quite untrue of the long run.

Memoirs of Extraordinary Popular Delusions and the Madness of Crowds; Mackay, Charles
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An Inquiry into the Nature and Causes of the Wealth of Nations; Smith, Adam
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"F. A. Hayek and the Rebirth of Classical Liberalism"; Gray, John N.
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F. A. Hayek and the Rebirth of Classical Liberalism, Bibliography

A-103b "The Uses of 'Gresham's Law' as an Illustration of 'Historical Theory'." History and Theory 1 (1962).

[Reprinted in B-13, Chapter 24.]