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Mending Gresham’s Law

November 12, 2009

Considering what we were saying earlier (What is Money?) about money being a medium of exchange and not so much a store of value it is interesting to look at Gresham’s famous aphorism:

“Bad Money drives out Good Money”

What Gresham says is that if you have two currencies circulating, the one losing most value or with the lowest intrinsic value will circulate most.

For instance: if you have Gold coins and paper money circulating unhindered side by side, most people will be more reluctant to give up the Gold than the paper.

Considering the low percentage of Gold in today’s transactions that sounds rather plausible.

So while what Gresham is basically saying is certainly worthwhile, it is his way of saying it which is noteworthy in our context. It is clear that Gresham considers money to be first and foremost a store of value. That’s what he would call ‘good’ money.

However, we have defined money as ‘a medium of exchange by agreement’. And if we say that money is a medium of exchange its success will be intimately related to circulation. It is therefore rather strange to call the best circulating money ‘bad’!

Its probably high time to repair Gresham’s Law and here is my proposal:

‘Good money drives out bad money!’.

In this way we say nothing new, Gresham’s basic observation is still intact, but we rephrase our priorities: good money is that which circulates effectively. The better store of value will circulate less and is therefore bad money.

To designers of ‘complementary’ currencies, who want to really compete with bank money, by providing high quality working capital, this is a golden opportunity.

Without interest, provided by a less powerful entity than the state, real currencies will be good currencies according to the repaired Law of Gresham.

Real currencies needn’t fear their initial modest status, because it implies an enormous strength.

From → Monetary Theory

  1. John Forest permalink

    You have some interesting ideas. I have not yet read every post so perhaps you have dealt with some of these things already.

    I would suggest the importance of including what is currently understood about human psychology.

    The basic tendency of humans to amass resources (hoard) will not disappear. The tendency of stronger or more industrious or clever persons or groups to dominate over others in order to increase their share beyond what they truly require will persist. These tendencies may indeed be less cooperative strategies but saying that does not change the facts.

    • Yes, there will be hoarding of resources, that’s not too much of a problem, although tax payer funded (bail out money) speculation tripling oil prices, as the Goldman Sachs crowd managed to do should simply be illegal. Let alone speculation with food, as is the name of the game today.

      However, without interest it would simply be useless to save money. Most would consider durable goods, real resources, opportune investments etc. more fitting ways of transferring currently available wealth to the future.
      And that is what ‘saving’ really is.

      Ergo: the rules of the system have a profound effect on the behavior of the people in it. To change behavior, change the system. And no system is more crooked than our monetary system……………

    • Zarepheth permalink

      Hoarding (or saving) resources is MUCH better than hoarding money. When disasters strike — and they will — saved resources will help both individuals and the community recover from the disaster. Saved money, well, if its in paper notes under a mattress, and still dry, it might keep you warm as fuel in a fire… If it’s saved in the bank, it won’t do anything for you. In the meantime, all that saved money causes huge price increases in the now scarce goods — food, clothing, and building supplies.

      Saved real resources, however, provide the actual wealth — food, clothing, building materials — by which people can quickly recover from disasters. People won’t have a lot of saved money, but the saved food, saved clothing, saving building materials will suddenly appear from storage, allowing people to eat, stay warm, and repair their homes and businesses.

  2. Gresham’s Law only proves gold is not money.

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