“Bad Money Drives Out Good Money”
There are some hills we’re willing to die on; this is one of mine:
“Gresham’s Law” is one long game of telephone/Chinese whispers up and down the centuries of monetary writing.
And a pretty trivial one at that.
Sir Thomas didn't create an economic law. He didn’t even discover a tendency about fixed-rate commodity monies that apply under certain very important conditions: He’s almost entirely innocent to this creation, the blame of which lay with Henry Dunning MacLeod some 300yrs later.
Indeed, all poor Gresham did – while negotiating the Crown’s foreign debts in Antwerp, the financial center of the day – was to point out to Queen Elizabeth in the monetary turmoil after Henry VIII’s debasements, that after the unfavorable (read: arbitrage-worthy) exchange rate based on the coin’s metallic content:
“all your fine goold was convayd ought of this your realme.” (https://archive.org/details/lifetimesofsirth01burguoft)
Kind of hard to derive monetary competition or a structural law favoring the equilibrium of "bad"/poor/cheap/inflated/fiat money from that.
Gresham's law is not a feature of economics or the market economy, the way for instance the Law of Demand or the Law of One Price is. Gresham's law is an outcome of artificial/institutional interventions -- usually a government mandating that two different monies have the same value. The supposed law (=price fixing), where "bad" money wins out, ONLY happens when an entity fixes two things at a given price, and that that price is different from the (world) market price.
But that makes it, per Joseph Schumpeter, trivial. Yes, if I hold two different monies that, per relative prices, have the same value, and a store is offering me 10% cheaper prices if I pay with one of those monies, of course I will use that one.
Here's Robert Mundell, Nobel Laureate, in a journal article from the 1990s:
“The motivating force underlying Gresham's Law is economy: we settle a debt or transaction with the cheapest means of payment. But that is what money is! In the world of exchange, debts are settled in the cheapest medium possible.” (https://www.usagold.com/greshamslaw-mundell/)
So, there is no law of nature/economics that favors inferior fiat money over pristine bitcoin money.
If anything, monies that in the past have overtaken rivals and had lasting power usually did so because they were STRONG, supplanting weak or inflating ones: Persian daric, Roman denarius, florins of 15th-C Italian city states, Spanish pieces of eight etc. Quoting Mundell again:
“The pound sterling in the 19th century and the dollar in the 20th century did not become the dominant currencies of their time because they were weak."
Bad money doesn’t drive out good money any more than bad cars drive(!) out good cars.
What happens in a free market is competition; goods compete at different price points. "Bad" cars trade at lower prices than "good" cars.
Gresham-type considerations only come into play when some institutional feature mandates acceptance at a non-market price (or there are severe punishments for using the overvalued money).
Lyn Alden, bless her soul, makes this error too:
That is fine as a general statement, and collapses down to an assertion that consumers prefer cheaper over more expensive goods -- it's more expensive to use bitcoin, not because of transaction costs (Visa/MC probably more expensive than Lightning) but because using bitcoin saddles the holder with capital gains tax and reporting requirements.
But that’s the Law of Demand, not Gresham.
Besides – and this is a very important point for invoking Gresham in our modern monetary times – THERE IS NO FIXED EXCHANGE RATE BETWEEN BITCOIN AND FIAT. If no fixed rate, no Gresham.
So, next time you hear a Bitcoiner invoke Gresham’s law for some modern monetary reason, think back to this MONEY LESSON
... and, politely, ask them to go screw themselves.
That's today's little money lesson.
Peace,
J
pennies or nickelsdimes and quarters