Gresham's Law

Gresham's law states that bad money will drive out good money if it is accepted as an equally viable asset. Good money begins to be hoarded and bad money becomes the currency of the country.

Sir Thomas Gresham was a well-known English financier during the reign of Queen Elizabeth I. He believed that the intrinsic value of the money was extremely important, i.e., how much precious metal was used in the creation of the coins. Paper money (fiat money) had no intrinsic value but was to be backed by the gold at Fort Knox.

Printing money is done to prop up the economy and boost people's morale. With this bogus and worthless money, everything can remain status quo in Washington, DC. When this is done, the truth is no longer important. People's false perceptions and an attitude of "I want what I want, and by golly, I'm going to have it" are what prevail in the economic world. Truth in lending takes a hit and housing bubbles and bank failures result.

Gresham's Law states that the legal tender laws keep bad money flowing. These laws expect the public to accept all monies as being of equal value within any denominational category.

These laws continue to promote bogus money as valuable. If a person has a coin with a high content of precious metals and one that contains no precious metals, which does that person spend and which does he/she save? This is how good money is driven out of circulation.

Legal tender laws act as a primary factor of price control. The bad money should be devalued and deemed to be worth less, yet it purchases the same amount of goods and services as good money. The legal tender laws allow for counterfeiting of coins and permit the printing of money in large sums. All are equally spendable. More importantly, they are backed by government approval.

Is there an answer to this problem? The answer could possibly be with the upper echelon. To quit printing worthless money could be the beginning of reform and is a focus of the current Internet Reformation. Equally persuasive is the idea that various forms of money ought to be allowed to compete with each other.

There is nothing wrong with scrip, for instance, backed by gold or silver so long as it circulates without undue favor. It can even be said that such paper scrip need to represent the full value of the gold and silver behind it. Free banking, the circulation of fractional reserve notes have a long history of apparent success as well. The key to solving Gresham's Law is to allow the market itself to decide on the value of money.