Mending Gresham’s Law
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.