Does Gresham’s Law only apply to metallic coins made of a valuable base metal? I know that here in Canada people are hoarding the old pennies that are actually made of copper in order to melt them down so that’s clearly Gresham’s Law in action.
What about the case of a country in which people hold a foreign currency instead of spending it, and spend their local currency, one which is falling in value? Is that considered Gresham’s Law in action?
Gresham’s law applies when there are two forms of currency in an economy, and one is undervalued relative to the other (i.e. one - the overvalued currency - has a minimum price control on it, and the other - the undervalued currency - a maximum price control.) For example, suppose that the government sets the purchasing power parity of silver and gold notes equal to 18:1 (silver:gold). Then suppose that the market ratio is 15:1. This will mean that gold is overvalued relative to the silver, and vice-versa. What will then happen is that the silver-demand for gold will fall, and the gold-demand for silver will rise. Silver will be more heavily desired and gold less so, and gradually there will be more gold in the economy than silver until the market parity is reached, and established at 15:1. So no, it does not apply only to metal, and yes, it would apply to foreign currencies too, provided the above holds.
-Jon
Good question.
Gresham’s law applies to government monies of equal face value but different market value. Without legal tender laws Gresham’s law does not exist. Should a private mint make a coin stamped 1 oz that only contains .95 oz it will not drive out coins actually containing 1 oz. It will simply be traded below its face value at its actual value of .95 oz.
If Gresham’s law was universally “bad money drives out good” then we would expect counterfit bills to drive out real ones. But since counterfit bills are not subject to the same legal tender laws as real bills this does not happen.
Edited: Had it flipped
I didn’t really answer the question, did I?
That private or foriegn minted coins are not used in places with legal tender laws is Gresham’s law. A face value of government money is declared to be equal to a quantity gold, which drives out the dearer of the two.
I want to say it generally aplies. If I live in a place where silver is mined, it would follow that it is exported highly. I believe whenever a thing is overvalued it causes a market reaction. Personaly, I collect coins minted from before world war two for there metal content and numistmatic worth.
In the case that the people value a currency not of their own, it is usually that they see more worth in the monies, which is fine. I do not think that the money rejected by the people maintains confedence, which is healthy.
I suggest you read Murray N. Rothbard’s A History of Money and Banking in the United States It begins with Gresham’s law.
I hope it is O.K. to post this but this is a good bit…
CONANT, MONETARY IMPERIALISM,
AND THE GOLD-EXCHANGE STANDARD
The leap into political imperialism by the United States in the
late 1890s was accompanied by economic imperialism, and one
key to economic imperialism was monetary imperialism. In
brief, the developed Western countries by this time were on the
gold standard, while most of the Third World nations were on
the silver standard. For the past several decades, the value of
silver in relation to gold had been steadily falling, due to (1) an
increasing world supply of silver relative to gold, and (2) the
subsequent shift of many Western nations from silver or bimetallism
to gold, thereby lowering the world’s demand for silver
as a monetary metal.
The fall of silver value meant monetary depreciation and
inflation in the Third World, and it would have been a reasonable
policy to shift from a silver-coin to a gold-coin standard.
But the new imperialists among U.S. bankers, economists, and
politicians were far less interested in the welfare of Third World
countries than in foisting a monetary imperialism upon them.
For not only would the economies of the imperial center and the
client states then be tied together, but they would be tied in such
a way that these economies could pyramid their own monetary
and bank credit inflation on top of inflation in the United States.
Hence, what the new imperialists set out to do was to pressure
or coerce Third World countries to adopt, not a genuine goldcoin
standard, but a newly conceived “gold-exchange” or dollar
standard.
Instead of silver currency fluctuating freely in terms of gold,
the silver-gold rate would then be fixed by arbitrary government
price-fixing. The silver countries would be silver in name only; a
country’s monetary reserve would be held, not in silver, but in
dollars allegedly redeemable in gold; and these reserves would
be held, not in the country itself, but as dollars piled up in New
York City. In that way, if U.S. banks inflated their credit, there
would be no danger of losing gold abroad, as would happen
under a genuine gold standard. For under a true gold standard,
no one and no country would be interested in piling up claims
to dollars overseas. Instead, they would demand payment of
dollar claims in gold. So that even though these American
bankers and economists were all too aware, after many decades
of experience, of the fallacies and evils of bimetallism, they were
willing to impose a form of bimetallism upon client states in
order to tie them into U.S. economic imperialism, and to pressure
them into inflating their own money supplies on top of dollar
reserves supposedly, but not de facto redeemable in gold.
The United States first confronted the problem of silver currencies
in a Third World country when it seized control of
Puerto Rico from Spain in 1898 and occupied it as a permanent
colony. Fortunately for the imperialists, Puerto Rico was
already ripe for currency manipulation. Only three years earlier,
in 1895, Spain had destroyed the full-bodied Mexican silver
currency that its colony had previously enjoyed and
replaced it with a heavily debased silver “dollar,” worth only
41¢ in U.S. currency. The Spanish government had pocketed
the large seigniorage profits from that debasement. The United
States was therefore easily able to substitute its own debased
silver dollar, worth only 45.6¢ in gold. Thus, the United States
silver currency replaced an even more debased one and also
the Puerto Ricans had no tradition of loyalty to a currency only
recently imposed by the Spaniards. There was therefore little
or no opposition in Puerto Rico to the U.S. monetary
takeover.42
The major controversial question was what exchange rate the
American authorities would fix between the two debased coins:
the old Puerto Rican silver peso and the U.S. silver dollar. This
was the rate at which the U.S. authorities would compel the
Puerto Ricans to exchange their existing coinage for the new
American coins. The treasurer in charge of the currency reform
for the U.S. government was the prominent Johns Hopkins
economist Jacob H. Hollander, who had been special commissioner
to revise Puerto Rican tax laws, and who was one of the
new breed of academic economists repudiating laissez-faire for
comprehensive statism. The heavy debtors in Puerto Rico—
mainly the large sugar planters—naturally wanted to pay their
peso obligations at as cheap a rate as possible; they lobbied for
a peso worth 50¢ American. In contrast, the Puerto Rican
banker-creditors wanted the rate fixed at 75¢. Since the
exchange rate was arbitrary anyway, Hollander and the other
American officials decided in the time-honored way of governments:
more or less splitting the difference, and fixing a peso
equal to 60¢.43
The Philippines, the other Spanish colony grabbed by the
United States, posed a far more difficult problem. As in most of
the Far East, the Philippines was happily using a perfectly
sound silver currency, the Mexican silver dollar. But the United
States was anxious for a rapid reform, because its large armed
forces establishment suppressing Filipino nationalism required
heavy expenses in U.S. dollars, which it of course declared to be
legal tender for payments. Since the Mexican silver coin was also
legal tender and was cheaper than the U.S. gold dollar, the U.S.
military occupation found its revenues being paid in unwanted
and cheaper Mexican coins.
Delicacy was required, and in 1901, for the task of currency
takeover, the Bureau of Insular Affairs (BIA) of the War Department—
the agency running the U.S. occupation of the Philippines—
hired Charles A. Conant. Secretary of War Elihu Root
was a redoubtable Wall Street lawyer in the Morgan ambit who
sometimes served as J.P. Morgan’s personal attorney. Root took
a personal hand in sending Conant to the Philippines. Conant,
fresh from the Indianapolis Monetary Commission and before
going to New York as a leading investment banker, was, as
might be expected, an ardent gold-exchange-standard imperialist
as well as the leading theoretician of economic imperialism.
Realizing that the Filipino people loved their silver coins,
Conant devised a way to impose a gold U.S. dollar currency
upon the country. Under his cunning plan, the Filipinos would
continue to have a silver currency; but replacing the full-bodied
Mexican silver coin would be an American silver coin tied to
gold at a debased value far less than the market exchange value
of silver in terms of gold. In this imposed, debased bimetallism,
since the silver coin was deliberately overvalued in relation to
gold by the U.S. government, Gresham’s Law inexorably went
into effect. The overvalued silver would keep circulating in the
Philippines, and undervalued gold would be kept sharply out
of circulation.
The seigniorage profit that the Treasury would reap from the
debasement would be happily deposited at a New York bank,
which would then function as a “reserve” for the U.S. silver
currency in the Philippines. Thus, the New York funds would be
used for payment outside the Philippines instead of as coin or
specie. Moreover, the U.S. government could issue paper dollars
based on its new reserve fund.
It should be noted that Conant originated the gold-exchange
scheme as a way of exploiting and controlling Third World
economies based on silver. At the same time, Great Britain was
introducing similar schemes in its colonial areas in Egypt, in
Straits Settlements in Asia, and particularly in India.
Congress, however, pressured by the silver lobby, balked at
the BIA’s plan. And so the BIA again turned to the seasoned
public relations and lobbying skills of Charles A. Conant.
Conant swung into action. Meeting with editors of the top
financial journals, he secured their promises to write editorials
pushing for the Conant plan, many of which he obligingly
wrote himself. He was already backed by the American banks
of Manila. Recalcitrant U.S. bankers were warned by Conant
that they could no longer expect large government deposits
from the War Department if they continued to oppose the plan.
Furthermore, Conant won the support of the major enemies of
his plan, the American silver companies and pro-silver bankers,
promising them that if the Philippine currency reform went
through, the federal government would buy silver for the new
U.S. coinage in the Philippines from these same companies.
Finally, the tireless lobbying, and the mixture of bribery and
threats by Conant, paid off: Congress passed the Philippine
Currency Bill in March 1903.
In the Philippines, however, the United States could not simply
duplicate the Puerto Rican example and coerce the conversion
of the old for the new silver coinage. The Mexican silver
coin was a dominant coin not only in the Far East but throughout
the world, and the coerced conversion would have been
endless. The U.S. tried; it removed the legal tender privilege
from the Mexican coins, and decreed the new U.S. coins be used
for taxes, government salaries, and other government payments.
But this time the Filipinos happily used the old Mexican
coins as money, while the U.S. silver coins disappeared from circulation
into payment of taxes and transactions to the United
States.
The War Department was beside itself:…
please read on
Good luck Jason.
I was taught about Gresham’s law at school and university, but only recently, when reading Rothbard, did I understand Jon’s point above. Gresham’s Law only exists when there is government interference in the market.
I am a proud anti-interventionist. I say that it causally follows; that when one goes to protect one group, he hurts all groups, and rarely ever achieves what it really was in the first place, to absolutly protect one group.
Protectionism fails.
Luckily, things change. Diversity is brilliant on all levels.
It is time to respect a true theory of value, and that can only be subjective, because all folks (like it or not) are truely individuals.
I was very suprised to find that the wikipedia article makes the same point. I’m impressed.