Gresham’s Law
Gresham’s law is a monetary principle typically applied to coinage. The essence of the law is captured by the phrase “bad money drives out good.” While money has a face value for units of exchange, like 25 cents or 10 cents, the basic metals used in the composition of the coin have a measurable value of their own. Gresham’s law says that legally overvalued currency will typically drive legally undervalued currency out of circulation.
Sir Thomas Gresham was a financial agent of Queen Elizabeth I and first described this phenomenon in 1558, which prompted the economist H.D. Macleod to coin the term Gresham’s law in the 19th century.
Canadian Prime Minister Mackenzie King once described the origins of Gresham’s law and its effects in a variety of circumstances, dubbing it the Law of Competing Standards.
In the reign of Queen Elizabeth, an official named Gresham observed that where different metals were in circulation as coinage and some were better than others of the same nominal value, the coins made of the inferior metal tended to drive the better out of circulation. The better coins were either hoarded or melted down and sold as bullion, were used in the fine arts, or were absorbed in the foreign exchanges. In other words, what Gresham discovered was that cheaper money tends to drive out dearer; that when people begin to discriminate between two coinages, they will invariably pay out the inferior and hoard the better, thus removing the better from circulation. This phenomenon once generally observed came to be described as a “Law,” and was identified with Gresham’s name, since it was Gresham who was first successful in drawing public attention to it. Amongst money-changers, Gresham’s Law of the precious metals is better known than the Ten Commandments.
Something analogous to Gresham’s Law will be found to obtain in the case of competing standards in Industry. Assuming there is indifference in the matter of choice between competing commodities or services, but that in the case of such commodities or services the labor standards involved vary, the inferior standard, if brought in this manner into competition with a higher standard, will drive it out, or drag the higher down to its level. This is effected by the opportunity of under-selling which comes, where in such cases human well-being is sacrificed to material ends. The superior standard, not being recognized or demanded, is unable to hold its own, and in time disappears. This Law is just as real and relentless in its operation in Industry as Gresham’s Law of the precious metals is with respect to money and the mechanism of exchange. Indeed, a more accurate exposition would describe both as manifestations of one and the same law, which I propose to call the Law of Competing Standards. I see no reason why economists should not recognize the existence of such a law, and incorporate it immediately in economic science as being quite as significant as the Law of Supply and Demand, the Law of Diminishing Returns, or any other Law accorded a place in its nomenclature.
The Law of Competing Standards is doubtless a part of the general Law of Competition, under which the cheaper of two commodities gains in competition a preference over the dearer. What Gresham discovered was an important sequence of the Law of Competition as applied to coinage; namely, the disappearance, in the course of time, of the superior metals. Observance of a like sequence in the case of standards in Industry is highly desirable. As respects labor standards, I believe that recognition of the operation of the Law of Competing Standards over ever-widening areas would do more than aught else to clear up the most baffling problems with which Industry is confronted, and to point the way to a solution of many situations which hitherto have seemed incapable of solution.1
As the two-party political system has sorted American voters by ideology and created a polarization in political identities, the application of Gresham’s law to politicians or political actors can be applied to our present circumstances. Even ancient observers applied the principle of Gresham’s law to the politics of their day. One such example comes from the Athenian playwright Aristophanes.
I’ll tell you what I think about the way
This city treats her soundest men today:
By coincidence more sad than funny,
It’s very like the way we treat our money.
The noble silver drachma, which of old
We were so proud of, and the one of gold
Coins that rang so true
Throughout the world have ceased to circulate.
Instead the purses of Athenian shoppers
Are full of phoney silver-plated coppers.
Just so, when men are needed by the nation,
The best have withdrawn from circulation.2
It is not my goal to single out the most incompetent and selfish politicians of our day by name. Some corruptions that abound will be highlighted in another essay of The Common Sense Papers. It is hard to tabulate a true list of politicians who have bowed out of service with a feeling that the system is no longer functional. Most cite family/personal reasons, or private industry opportunity, for resigning or retiring, but whatever the label—the choice to leave office is always compared with the choice to stay in office, and staying in office is no longer offering a functional game.
Likewise, the number of resignations from Congress since the early 20th century paints an awkward trend. The rise in resignations for the stated purpose of jumping to the private sector is much higher in the past 30 years, which might be one of two signals: 1) the crony capitalism within the system is drawing politicians away from public service to cash in on their influence for monetary gains, or 2) the ability to function in Congress is so bad that offers to be rewarded properly for private accomplishments is more attractive than staying in service of public political goals.
The other noteworthy issue impacting resignations is the number of sexual misconduct episodes in the past 30 years. The year 2018 saw a spike in the number of #metoo related scandals that triggered various resignations from public office. Chasing politicians of good character from office would naturally leave more political operatives who seek to turn power into economic gain, or abuse status for sexual reward, or simply fail to maintain the public trust while engaged in the people’s business of government legislative activity (see chart).
Gresham’s law has been at work on the collapse of political character felt in too many parts of both major political parties in our day. The chart below runs from 1901 to 2018 with each bar representing a two-year class of Congress. Note the diversity of scandals driving resignations in the most recent (final) ten bars of the chart, roughly from 2000 to 2018. This chart only shows counts for those who resigned. It doesn’t capture the scandals for those who refuse to resign.
If we don’t find an effective way to side-step the two-party system, Americans will continue to be led by individuals who represent us with appeals to base vices and fears. The political dynamic is likely to continue to degrade with a widening pull toward opportunists, despots, tyrants, and authoritarians as the principal political actors on both sides.
Notes for new readers:
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"Mental Model: Gresham's Law," Farnam Street, https://fs.blog/mental-model-greshams-law/ (accessed October 26, 2023).
Ibid.