Old Reflections on New Questions
The reign of Henry VIII and his son Edward VI were not only known for the invasion of France or the turbulent beginning of the Anglican Church, they also left a very harmful historical mark: high inflation.
Only between 1542 and 1551 did the coins of the kingdom lose 1/3 of the silver content they initially had.
There were successive episodes of reduction in the percentage and/or purity of the metal, in the greatest period of highest English inflation of the entire 16th century.
The problem was pushed forward until Edward VI's eldest half-sister, Queen Elisabeth I, took the throne in 1588 with the purpose of trying to reorganize the monetary system, with the famous merchant Sir Thomas Gresham as her main adviser.
Following the advice of Sir Gresham, the queen herself ordered the collection and re-minting of all coins in the kingdom, an unpopular process that bears similarities to what is now understood as “monetary tightening” or QT (quantitative tightening).
At the time it was described as a necessary sanitation of the currency that sought to restore the quality of the coins that circulated in English territory.
During this process, the shortage of coins was such that it became a popular saying that citizens of London were plagued by a 'triple plague': the pestilence, the shortage of coins and the lack of food.
Although the effect of this initial measure actually contributed to the scarcity of means of payment in English territory, the results ended up being excellent and the sanitation promoted by the queen meant that inflation during the reign of Elisabeth I was much lower than her predecessors, around of 50% in 38 years.
With a better currency at their disposal and more freedom to negotiate through the repeal of several laws, the English were soon able to live their own version of the Renaissance, with more solid economic growth and enormous artistic development, not by chance that the Elizabethan theater is still seen today as one of the richest periods in Western cultural history.
It was a period that nurtured geniuses of philosophy such as Francis Bacon, and also reached the pinnacle of theater and literature by authors such as Christopher Marlowe and William Shakespeare himself, who died rich with the fruits of his literary production and shareholding in theater companies.
Though necessary to restore soundness to the coin, Good Queen Bess's efforts had their practical limits. The sanitation promoted by the queen did not prevent the widespread crime of clipping coins to reduce their metallic content, a practice that was then known as money clipping.
A first irony of clipping is that it was not simply a crime of fraud or theft, but rather a crime of treason, since the very figure of the monarch was stamped on the coin and his degradation a crime of lese majesty, a type of blasphemy.
Those who practiced clipping, in addition to taking advantage of it, also violated the very dignity of the monarch whose face was stamped there.
The second irony is that historically the greatest practitioners of clipping were the irresponsible monarchs themselves, such as the queen's father and half-brother, who used the royal prerogative to finance their profligate governments.
No wonder the malpractices of kings in monetary matters provided the great memetic material of the time.
“It is no English treason to cut French crowns, and tomorrow the King himself will be clipper (Ato IV cena I 222)"
Upon mentioning that the king himself will be a clipper, he announces that he intends to behead the French king, jokingly confessing his monetary crimes as well. In another Shakespearean play, King Lear appears in a scene in disguise and boasts that he can do this with impunity by saying:
"“No, they can't touch me for coining; I am the king himself” (Ato IV cena VI 82)"
If the reader of these plays does not keep in mind the political and monetary double meaning of these references, he simply will not understand Shakespeare's fine irony and economic criticism in these passages.
Whether practiced by sovereigns or the general population, coin clipping made the currency medium full of coins of different qualities, which brings us back to Sir Thomas Gresham and the famous law that earned his name, which is usually formulated simply as: bad coin drives out good coin.
Historical accounts say that this famous “law” originates from a letter from Gresham to Queen Elisabeth I herself, but this was just a rationalization of the British economist Henry Dunning Macleod in 1858, who simply baptized as “law” the tendency of bad money to expel the good coin noted by Gresham in his charts.
But we must analyze this formulation with due care. It is a common mistake among economists (especially those who defend the monopoly of coinage) to describe Gresham's Law as simply 'the bad coin drives out the good coin', as if in an economy where two coins circulate in which one one that retains value.
And one that does not, people will normally want to use and circulate those that they do not retain, that is, to use the weak currency and keep the good one for themselves, generating a shortage of good coins in the market.
The false conclusion many come to is that the free competition of currencies cannot be trusted as people will only want to accumulate and not spend the good coins and that a control of this “anarchy” by a monopoly authority is necessary.
There are people who go further and use Gresham's Law to even explain the need for the invention of paper money, which would remedy this problem inherent in commodity money by establishing a single standard.
Given this confusion, it's good to put things in their proper places. The fact that bad money crowds out good money has been common in human history since the invention of legal tender.
There are reports of this phenomenon in antiquity and also in the medieval period, just look at the references in the scholastic treatise on coins by Nicolau Oresme in the 14th century.
That's why we must first ask ourselves: the bad currencies drive out the good ones, but where do they drive them out? And why are they actually kicked out?
Gresham's exact words written to the Queen were:
“all your fine gold was conveyed out of this your realm"
This was because the bad and degraded coins circulated in the kingdom of England, as the biggest merchants, especially those who dealt with international trade, kept the good and intact gold coins to use them in their business, as a good currency to pay the invoice of importers in international trade as well as today.
Expelling, then, is in the literal sense, since the good coins left the kingdom of England to be used in the international market, where there were no price controls or forced tender laws. Worse currencies did indeed drive out better ones, but only under special conditions.
Let us imagine that there is a coin in circulation that weighs one ounce of silver and that has the face value (or face value) of one ounce of silver as well. After circulating for a long time and or after a few scratches by profiteers, this same coin actually contains less than an ounce of silver.
It is expected that in a free market people would accept this currency at its reduced value and its face value would be ignored or discounted. But suppose the government, by law or decree, dictated that bad coins should be accepted, by legal tender, at their face value and not at the value of their metallic content.
What the government does in this case is to impose price controls via coercion, a direct intervention in the market, making everyone forced to accept the cat in a poke, that is, the actual value as the nominal value - in the Wealth of Nations by Adam Smith.
The expressions by weight are used, that is, by weight, or by tale, at face value, which causes confusion for some readers.
It should be noted that in this case, the expulsion of the weak currency does not occur solely on the grounds that the weak currency will lose value over time, that is, due to the future prospect of higher inflation.
The reasoning is: since this person, the producer of the good or service, is obliged by the law of legal tender to accept the lesser value coin as if it had a greater value, I will use the lesser value to make the payment.
Worn and scraped coins start to circulate with a premium artificially imposed by the government and new and pure coins, as a corollary, start to circulate with a discount.
The expulsion is due to this distortion because people were not free to choose the monetary good they wanted and this also occurred when governments instituted a fixed price in the exchange between silver and gold.
In Sir Gresham's sixteenth century the laws of legal tender were justified by the authority of the king's sovereignty; in the kingdom it was an offense not to accept the royal currency even at its face value, that is, at the price that the sovereign determined.
Penalties for not accepting bad coins as good ones included imprisonment, fines, and confiscation of the value used. With this punitive background, it is no wonder that the bad coins were the ones that circulated the most. Therefore, the correct formulation of Gresham's law is:
Money artificially overvalued by the government will entail the expulsion of money undervalued by the government
When, listening to Gresham's advice, Elizabeth I abolished many of these laws and let people freely assess the values of bad shillings, good coins became part of everyday life in the kingdom again.
As stated above, Gresham's 'law', which is nothing more than this tendency caused by direct intervention in the economy, is generally invoked by people opposed to monetary competition, as in the famous work of William Stanley Jevons, Money and Mechanism of Exchange (1882).
Where Jevons rejects Herbert Spencer's arguments in favor of private coinage using Gresham's law. But, in situations where there is no authority forcing money, the opposite tends to happen: the good currency tends to expel the bad currency.
There are several examples where this occurs, the most common and known is in foreign trade itself, the good currencies drive out the bad ones to this day.
The famous fiorino d’oro (florin) was for centuries the most used currency in international trade due to its reputation for maintaining the quantity and quality of gold for centuries, which is why today it is described as the “dollar of the Middle Ages”. But not only in foreign trade.
In the United States, during the California gold rush, private gold coins circulated freely, as did the private coins of the Philadelphia Mint. Although dollar-denominated, there were no legal tender laws to enforce them, people were free to price them as they pleased or reject them in their business.
In practice, only the best coins were accepted as the others were not representative of their dollar value. These conditions mirrored those found in international trade, where there are no legal tender laws forcing merchants to accept means of payment at face value.
The reader may rightly think that we are now in another era of monetary history and that we have been under the absolute dominance of fiat currency for many years now, where all this discussion about the difference between face value and fact value no longer exists.
Under the validity of nominalism and the dematerialization of money, the only official value of a fiat currency is exactly what is stamped on it, that is, a tautology where a currency of one Real is worth one Real, a coin of one Dollar is worth one Dollar, and so on, without a relevant metallic content that can serve as a comparison.
Would it make sense, then, to still talk about Gresham's law?
The money ballast was lost, or rather stolen by the government, but the legal tender laws obviously did not go away. On the contrary, they have even been expanded in various ways, from the banning of so-called “gold clauses” to the widest range of capital controls by central banks that exist in virtually all jurisdictions.
Taking advantage of these new powers, governments today, far more spendthrift and far more indebted than any sixteenth-century sovereign, can simply issue new units at practically zero cost, increasing the monetary base without needing any precious metals to serve. base or ballast.
The fiat currency we have today is the government's full product, not a free market choice. If there weren't tight capital controls.
Legal monopolies and legal tender laws that oblige banks and citizens to use the different fiats, they would not exist and would be rejected by producers and traders who would certainly use better monetary goods.
Fiats, therefore, are even more inferior forms of money, as they are much more inflated and require an entire coercive structure to continue to function. However, people and companies, just like in the 16th century, still want a good currency to store value for the good or service they are offering in exchange.
The birth of fiat currencies was, of course, a way to enhance seigniorage, whose only limit is hyperinflation and/or the complete inapplicability of currency laws for practical reasons.
If these laws are in place to force someone to receive money that no one or the majority sees value, they simply become disobeyed. They become one of those laws that simply “don't work” and are ignored by the vast population.
For such situations, it is appropriate to invoke Thiers' Law, named by Peter Bernholtz in honor of the French politician and historian Adolphe Thiers, which precisely describes situations where legal tender laws are ignored and the good currency tends to expel the bad currency.
This “law” is also a universal trend: whoever produces something of value always wants to receive good money and, in the absence of laws that oblige the opposite, this tends to be the dominant behavior of the market, which ends up eliminating bad coins.
After the invention of Bitcoin, the digitization of money now acts as a double-edged sword for fiats. Governments still manage to take advantage of the widespread and naturalized existence of fiat currency, but legal tender laws do not work in a world where open source money is easily available to all.
Bitcoin, a network that you can use without having to ask anyone's permission and in a sovereign way, has practically made any kind of law inoperable.
In addition to technological change, awareness is growing that it is profoundly unfair to force someone to accept money he does not want to accept in exchange for his own produced good or service.
Technology has also evolved to the point where a consumer can, using certain digital wallets, pay in fiat but the seller will receive in Bitcoin or vice versa using an instant buy and sell mechanism. This is a sign that we are in another world where the structure set up to make a fiat operate is no longer applicable.
We can cite numerous other arrangements. For example, today in Argentina, in addition to several unofficial exchange rates, it is possible to pay bills at a restaurant using QR codes issued by brokers with parallel exchange rates (see here) - [].
For these reasons, I see the claim that people are just accumulating Bitcoin without wanting to spend and that this pattern will continue from now on is wrong.
Under conditions of freedom and when many people know of the superiority of Bitcoin, it will be more common for producers of goods and services to demand payment in the best currency of all.
This will force consumers to buy Bitcoin in order to satisfy this market demand. Thiers' law will normally apply: Bitcoin will make other forms of money obsolete and they will no longer be accepted in the market naturally.
If central banks do indeed try to deploy their digital currencies to retail (Real Digital, Euro Digital, Dollar digital, etc.), they too will have to compete with Bitcoin and will certainly lose out as they are even more inferior forms of monetary goods. Long live freedom.
the text was published on guilherme bandeira's substack (https://guilhermebandeira.substack.com/)