Gresham's Law

Thomas Gresham

Gresham and Copernicus have the commonality about the theory "bad money drives out good money" as it was our astronomer friend actually came up with the core of it some years before Gresham's Law made the rounds.

I've been reflecting on this for several weeks and came to the realization that I misunderstood.  There is a relative aspect to what constitutes good and bad money.  In the most extreme good would be government tender and bad would be counterfeit. In this case people would hoard the good money and not mix the two for fear of by chance picking up a load of the bad stuff.  The bad money drove the good money "out of circulation".  OK. clear enough, but that isn't what Gresham really meant.

I am now thinking that what was meant was when there were two forms of currency in circulation when both the good and the bad were worth the same under legal tender laws that the good money became a commodity.  Indeed our friend Copernicus was involved in turn coins into melted down commodities.

Nicolaus of Kopernic

If a loaf of bread sells for a silver dollar you get a good buy if you pay for it with bad money and you get taken if you buy it with good money.  Perhaps the commodity level is reached when the disparity is such that the value of the good money isn't affected by melting it down into a gold bar as you can't in any way produce a method "intra-currency" to swap good for bad.

When I was in Russia during the 80s dollars coming "in country" had to be declared and exit had to equal entry.  That was the theory. You could, however, freely convert dollars to rubles so that the government effectively decided that the dollar was good and the ruble bad. 

 

If you decided to risk it and pay locally there in dollars you got far more than the conversion rate would indicate and as there were laws about citizens there owning dollars these we driven out of circulation - not exactly Grisham/Copernicus's thinking but a modern day equivalent. 

I'll think some more on this and get back to you.