Untitled Document
Coins & bullion since 1973


Uses and Abuses of Gresham's Law
in the History of Money

by Robert Mundell
Nobel Prize for Economics, 1999


Andréadès, A. 1966. History of the Bank of England. London: Cass.

Arnott, Peter D. 1961. Three Greek Plays for the Theatre. Bloomington: Indiana University Press.

Baldassarri, Mario, McCallum, John and Robert Mundell, eds. 1992. Global Disequilibrium in the World Economy: Central Issues in Contemporary Economic Theory and Policy. London: St. Martin's Press/SIPI.

Bolin, Sture. 1958. State and Currency in the Roman Empire to 300 A. D. Stockholm: Almquist & Wiksell.

Buckley, H. 1924. "Sir Thomas Gresham and the Foreign Exchange," Economic Journal 34.

Burgon, J. W. 1839. Life and Times of Sir Thomas Gresham. London.

Burman, Edward. 1986. The Templars: Knights of God. Rochester, VT: Destiny Books.

Carradice, Ian and Martin Price. 1988. Coinage in the Greek World. London: Seaby.

Del Mar, Alexander. 1885. History of Money in Ancient Countries. New York: Burt Franklin.

-------------------------1895. The History of Monetary Systems in Various States. London" Effingham Wilson and Royal Exchange.

Ehrenberg, Victor. 1973. From Solon to Socrates.London: Methuen.

Finley, M. I. 1968. Ancient Sicily: to the Arab Conquest. New York: The Viking Press.

Harris, Sir C. Alexander. 1926. "Gresham's Law." In Higgs (1926: 262-63), Vol. II.

Hayek, Friedrich A. 1967. Studies in Philosophy, Politics and Economics. Chicago: University of Chicago Press.

------------------------1967. "The Uses of 'Gresham's Law' as an Illustration of 'Historical Theory.'" In Hayek (1967: 318-20).

Higgs, Henry (ed.). 1926. Palgrave's Dictionary of Political Economy. London. Macmillan, 3 vols.

Howgego, Christopher. 1995. Ancient History From Coins. London and New York: Routledge.

Hume, David. 1886. Hume's Essays: Literary, Moral, and Political. London: Ward, Lock & Co.

Kelly, Amy. 1950. Eleanor of Aquitaine and the four Kings. New York: Book of the Month Club.

Knight, Charles. 1881. The Popular History of England. 8 vols. New York: Lovell.

Li, Ming-Hsun. 1963. The Great Recoinage of 1696-9. London: Wiedenfeld and Nicolson.

Madox, Thomas. 1769. History and Antiquities of the Exchequer of the Kings of England: Taken from the Records. 2 vols. London.

Marshall, Alfred. 1923, 1960. Money, Credit and Commerce. New York: Kelly.

McCulloch, J. R. 1856. Old and Scarce Tracts on Money. London.

Mill, John Stuart. 1848, 1909. Principles of Political Economy (Ashley ed.). London: Longmans, Green and Co.

Mundell, Robert A. 1965. "Growth, Stability and Inflationary Finance," The Journal of Political Economy, LXXIII, No.2 (April):97-109. 1968.

-----------------------1968. Man and Economics. New York: McGraw-Hill Book Company.

-----------------------1989, 1993."The Global Adjustment System," Rivista di Politica Economica 79, No. 12 (December 1989): 351-465. Reprinted in Baldassarri, McCallum and Mundell (eds.) 1992: 351-465.

-----------------------1997. "The International Adjustment Mechanism of the Balance of Payments." Zagreb Journal of Economics 1 (No. 1): 3-57.

Palgrave, R. H. Inglis. 1926. Dictionary of Political Economy, vols. 1-3. London: Macmillan.

Roover, Raymond de. 1949. Gresham on Foreign Exchange. Cambridge: Cambridge University Press.

Schumpeter, Joseph Alois. 1954. History of Economic Analysis. New York: Oxford University Press.

Seigler, G. L. 1968. The Emergence of the Eastern World. Oxford: The Pergamon Press.

Shaw, W. A. 1895. The History of Currency: 1252-1894. London: Wilsons & Milne.

Smith, Adam. 1776, 1994. The Wealth of Nations (Cannan ed.). New York: Modern Library.

Spufford, Peter. 1986. Handbook of Medieval Exchange. London: Royal Historical Society.

Sutherland, C. H. V. 1969. Gold: Its Beauty, Power and Allure. London: Thames and Hudson.

Thompson, W. E. 1970. "The golden Nikai and the coinage of Athens," Numismatic Chronicle 10: 1-6.


1. Ehrenberg (1973: 26).

2. Del Mar (1895: 49). The reference is to Maxims line 119. Del Mar dates Theognis' life from 570 to 490 BC.

3. Quoted in Del Mar (1895: 355). The reference is to Maxims, line 19.

4. In Frere's translation:

"Oftentimes have we reflected on a similar abuse

In the choice of men for office, and of coins for common use;

For your old and standard pieces, valued and approved and tried,

Here among the Grecian nations, and in all the world beside,

Recognized in every realm for trusty stamp and pure assay,

Are rejected and abandoned for the trash of yesterday;

For a vile, adulterate issue, drossy, counterfeit and base,

Which the traffic of the city passes current in their place!"

In Arnott's translation (intended for the theater):

"It's the same with solid citizens as with our currency;

Both are calculated to induce despunnency.

It's not that we don't have enough good coinage

Free from counterfeitry and purloinage,

Mint-guaranteed, without a trace of fraud,

Honored at home, hard currency abroad.

But we never use it! We would rather settle

For second-rate adulterated metal,

Struck yesterday! We have men of reputation,

Sober and honest, with a liberal educaton,

But we maltreat them! and our state relies

On wetbacks, not greenbacks, alloys, not allies.

You idiots, return to proper courses,

Honor the men who are your best resources.

If you succeed, the world will sing your praise;

If not, you chose a noble way to end your days.

See Arnott (1961:173).

5. Lord Macaulay, in his History, Vol. IV, p. 623n, was one of the first to ascribe the law to Aristophanes. As already noted, it was first called "Gresham's Law" by Macleod in his Theory and Practice of Banking in 1858.

6. Howgego (1995: 111).

7. ibid.

8. If this account is correct, it implies that 14 talents weight of gold or about 12,440 ounces of gold (taking the talent weight at about 60 pounds).

9. ibid. The Encyclopedia Britannica article (EB CD-ROM (1995: Coins and Coinage)) asserts that the coinage in the year following the reduction of the Victory statues, bronze small change was produced that proved to be "an unpopular substitute for the tiny silver coins previously carried in the mouth." This conflicts with Howgego, who asserts that: "Athens did not produce small change in base metal until the second half of the fourth century BC."

Other writers differ from these accounts. Sutherland (1960: 72-73) argues that it was the 35-foot high gold-and-ivory statue of Athena (the Virgin) Parthenos that was later reduced to finance the Athenian expenses. See also Del Mar (1895: 51). In constructing this statue, Phidias, at the order of Pericles, had the gold put on in such a way that it could easily removed -- presumably to keep it as a liquid asset in a time of emergency. It proved to be -- for Phidias and Pericles -- a lucky stroke.

With war fast approaching the party of Pericles came under attack and the opposition, unable to attack "Zeus" (as Pericles was sometimes called) picked on those near him, first his famous friend and teacher, the scientist Anaxagoras (c.500-428 BC), and then the great Phidias. Anaxagoras had earned the enmity of the priesthood by seeking natural causes of unusual events and was persecuted for asserting that the Sun is an incandescent stone larger than the region of the Peloponnese; he was saved from execution by Pericles but hounded out of Athens, to retire and die in his native Lampsachus. Phidias was fist charged with embezzlement in the matter of the gold appropriated for the great statue of Athena Parthenos, a charge alluded to is Aristophanes' The Peace; the scheme failed completely when Pericles ordered the plates to be removed from the huge statue and verified that the amount of gold tallied with the appropriation. But his foes were unrelenting and Phidias was found guilty of introducing his own portrait and that of Pericles on Athena's famous shield, a charge from which Pericles could not save him. The sculptor was thrown into prison, where he sickened and died.

According to Sutherland and Del Mar, it was the gold from the Athena Parthenos that was melted down in 407 BC to cover wartime expenses of the Athenian treasury; according to Thompson (1970) and (Howgego (1995: 111), it was the set of Nikai (Victory) statues. Whichever story is correct -- and the implied production of gold coins seems to high in both instances -- it was not sufficient. A year later Athens had recourse to a copper coinage. This was not small change, but rather a replacement for silver coinage. The introduction of the debased coins of course caused the beautiful Athenian coins to disappear in hoards or abroad. The lesson was apparent to all Greeks that the introduction of overvalued (cheap, base, bad...) coins would cause all the good coins to be used abroad and all the bad coins, which were legally acceptable in Athens, would stay at home.

10. Carradice and Price (1988: 100).

11. Carradice and Price (1988: 102).

12. Carradice and Price (1988: 54).

13. Seigler (1968: 175).

14. Quoted in Marshall (1923: 60). There remain some doubts that it was written by Hales, who was at one time a parliamentarian and had to leave England for political reasons during the reigns of both Mary and Elizabeth. The work, published in 1581, was signed W. S., A Gentleman, which led, because of the richness of its thought and the characterization of the participants in the debate, that the author was none other than William Shakespeare. Because, however, Shakespeare was only seventeen at the time, this is now thought to be unlikely.

15. The following account is taken from Palgrave (1926) III, 261-263; and Orsingher (1967: 42-43). Basic sources are Burgon (1839) and de Roover (1949).

16. Gresham's pay was twenty shillings a day.

17. His wealth was earned mainly from his private business, but he was not above forwarding his schemes by bribery. His own son having died young, he turned to public activities and philanthropy. The foundation of the royal exchange, of Gresham College, eight almshouses, and the earliest English paper-mills on his estate at Osterley show the breadth of his interests.

18. Schumpeter (1954: 342-43f.) has the following common on Gresham:

"He was a type that can no doubt be found everywhere but of which the English specimens are to this day so much more frequent and so much superior that it may well be called English: the businessman who is just as much a public servant as he is businessman and who, though perfectly successful in looking after his own advantage, serves the state in ways that are beyond the competence of the mere public servant. . . We may use this opportunity to notice the two analytic achievements that have been placed to his credit. First, he described correctly enough the rules that apply to the movements of the rate of exchange with reference to the specie points, and he holds priority over Davanzati, who however did a much better job in 1582. . . Second, there is Gresham's Law, the proposition that if coins containing metal of different value enjoy equal legal-tender power, then the 'cheapest' ones will be used for payment, the better ones will tend to disappear from circulation -- or, to use the usualy but not quite correct phrase, that bad money drives out good money. This phrase occurs in the Royal Proclamation 'decrying' base silver coin in 1560, when Gresham is known to have been the government's chief adviser in such matters. There is also a memorandum of his (1559) which argues the case."

19. On the "law of economy" see Mundell (1968: ch. 1).

20. See the passage quoted above.

21. Cf. Hayek (1967: 318).

22. Palgrave's Dictionary II (1926:262) asserts that "in the case where the combined amount [of the good and bad money] in circulation is not sufficient to satisfy the demand for currency, the more valuable medium will simply run to a premium." :

23. The qualification is needed to allow for the fact that the export of gold will raise the world and therefore the home price level, an effect that would be large if the country -- and the new money issue -- were large. I have dubbed the latter effect in Mundell (1989, 1993) the "Thornton Effect" in honor of Henry Thornton (the banker-economist-parliamentarian-philanthropist who, writing in 1802, first discovered it.) It allows for the fact that the export of specie to the rest of the world raises world prices.

24. Hume's essay, "Of the Balance of Trade."

25. ibid.

26. Smith (1776, 1994: Bk. 2, Ch.2).

27. Mill (1848, 1909: 544).

28. loc. cit., 551.

29. If there is a private banking system, the government will be able to replace only "high-powered" money, which means that the fraction of GDP available for seigniorage is only a fraction of the above formula. For a comprehensive discussion of the seigniorage issue and its relation to inflation and growth see Mundell (1965).

30. Finley (1968: 75).

31. Plato's main ideas on money, are, however, in The Laws, a work that was much later than The Republic, completed (if at all) toward the end of Plato's life.

32. Del Mar (1885: 169).

33. ibid.

34. See Finley (1968: 91). Plutarch's sources are mainly a collection of thirteen letters dubiously supposed to have been written by Plato. On the first of his three trips to Syracuse, in 388 or 387 BC, Plato met the young Dion, Dionysius' rich brother-in-law, whom he instructed and cultivated when Dion was in exile in Greece. After Dionysius' death in 367 BC, Dion encouraged his successor, Dionysius II, to bring Plato back. Dion later attacked Syracuse and a long civil war broke out, with Dion being assassinated in 354 BC. Plato's involvement in the whole episode remains obscure.


36. Spufford (1986: 198). The term "mite" or "mijt" was borrowed from the Low Countries where it designated the smallest coin issued there; it was never coined in England.

37. Other sums changing hands put the ransom in international perspective. Henry II gave the Templars and Hospitallers 30,000 marks to improve the defenses of the city of Tyre (Burman (1986: 112)); Tancred, who had usurped the throne of Sicily, paid Richard 40,000 ounces of gold for the settlement of his sister Joanna's dower which Tancred had confiscated (Knight 1881: vol. 1, 343)). Richard sold the island of Cyprus to the Templars for 100,000 gold dinars (of which only 40,000 had to paid in cash, and the rest in instalments payable from the island's revenues (Burman (1986: 114)).

38. See Del Mar (1895: 238). The particulars of the collection process are given in Madox (1769)

39. The marks weight of Cologne was natural, Del Mar agrees, "that being the standard of weight with which the emperor was most familiar. Notwithstanding this testimony, it may be safely conjectured that there was no new coinage, for such an operation would have been needless, tedious and expensive. The old coin and bullion was probably melted down, refined, cast into bars, assayed, weighed, and delivered to the emperor's legate -- a supposition that precisely agrees with Polydere Vergil's account of the affair."(40)

40. -

41. Kelly (1950: 310).

42. ibid.

43. Another argument could have been made against the seigniorage approach to financing the ransom. In 1194 the realm was in a state of civil war. Philip II (Augustus) of France had returned before Richard and was laying siege to Normandy, and Richard's brother, Prince John, was conniving with him. The imposition of a forced currency depends on the strength of the central state and that did not exist during Richard's captivity. Indeed, the Emperor, Henry Hohenstaufen, had already received a competitive offer from Philip and John: they would each contribute 50,000 marks if Henry would keep Richard in captivity until the following Michaelmas (September 29). When Eleanor did finally make her way down to Mainz with the ransom, there was considerable delay, but finally, the exchange was made. See Kelly (1950: ch. 28) for further details.

44. Andréadès, op. cit., 95; and Macaulay op. cit., Vol. II, 543..

45. William Lowndes (1652-1724) was appointed Secretary of the Treasury in 1695.

46. Lowndes' Report is reprinted in J. R. McCulloch, Old and Scarce Tracts on Money, London 1856.

47. In support of devaluation, he amassed historical evidence going back to the reign of Edward I, in which he showed that the standard of both gold and silver coins had been altered many times with the result that their nominal values were increased more than threefold. Thus in the time of Edward I, a pound troy weight of silver was coined into 20s 3 d, whereas in 1695, it was coined into 62s; and a pound weight of gold of a fineness of 23 carats and 312 grains was coined into £15 four hundred years ago, but now the same weight of gold of only 22 carats fineness made £44 10s. The change in the monetary standard occurred in almost every reign and it was often done not by altering the fineness or weight of the coins but by raising their denominative value.(48)

48. Li, op. cit, 95-6.

49. The men referred to were: (1) William Lowndes (1652-1724), appointed Secretary of the Treasury on April 24, 1695; he had worked in the Treasury as early as 1679 at the age of twenty-seven, and occupied the office until his death on January 20, 1724(50)

50. Li, op. cit., 95; this information is from the Dictionary of National Biography, Vol. XXXIV, Section on William Lowndes. - - -

51. Macaulay apparently did not have access to Newton's manuscript, Goldsmiths' Library MS 62, discovered by Ming-Hsun Li and reprinted as Appendix III in Li, op. cit. and excerpted below.

52. In practice, at any time (and as already noted) the coinage supply is composed of coins of different qualities, which means that the sharp conclusions are somewhat blurred. When silver is overvalued, as it was between 1792 and 1834, it will be the dominant standard, but some of the most worn or clipped of the gold coins will remain in circulation. Similarly, when gold was overvalued, as it was between 1834 and 1862 (when, under the exigencies of wartime finance, the dollar became inconvertible), gold will be the dominant standard but the worst of the silver coins will remain in circulation.

53. By the Act of February 24, 1853.

54. This paragraph draws on Shaw (1895: 226-34).

55. Nussbaum (1950: 44-45).

56. Nussbaum (1950: 47).

57. Nussbaum (1950: 48).

58. Nussbaum (1950: 46 f.6). The reference is to the contribution of Paul Harsin on "La Banque et la Système de Law" in Van Dillen (1934: 282).

59. Nussbaum (1950: 46).

60. Grimaudet (1579, 1900: 49).

61. Del Mar (1895: 136).

62. The most spectacular of all discoveries has been described as follows: "On 12 June 1366, at Touvres, fifty kilometres east of Marseilles, children came across some coins which had fallen from a small hole. When they enlarged the hole with their hands coins proceeded to shower from the side of the bank 'like a water fountain'. The shower continued for some time, and when the silver was collected it required twenty mules to carry it off. It has been estimated that the weight must have been in the region of two thousand four hundred kilogrammes. The coin type was described and can be identified as an obol of Massalia which weighed only half a gramme. The deposit must have contained some four million pieces!"(63)


64. In the example I have introduced, an increase in hoarding would be deflationary since the coins remaining in circulation, i.e., not hoarded, will have to do the work also of the hoarded coins. A more likely situation is that the same emergency (e.g., civil war) that increases the intensity of hoarding will also increase the supply of overvalued currency, and usually by more than the hoarding. In this case the combined effect will be one of inflation rather than deflation.

65. Bolin (1958: ch. 4 on "Denarius perpetuus and Gresham's Law.")

66. Bolin (1958; esp. Ch. 4).

67. See Friedrich Hayek's conclusions about the usefulness of Gresham's Law for historians, in which he concludes:

"If Gresham's Law is properly stated with the conditions in which it applies, it will appear that as a proposition of compositive social theory it can indeed provide a useful tool of historical explanation. . . The historian who knows of Gresham's Law merely as an empirical proposition might well be puzzled when he find that, after good and bad coins had been circulating concurrently for decades without a noticeable deterioration in the average quality, at one point of time the good coins had suddenly begun to grow very scarce. He would be able to discover any new information which had become available concerning the 'undervaluation' of one kind of coin. Indeed if he were able to ask those immediately concerned they would tell him that they merely continued to do exactly what they had done before. What theory will tell him is that he must look for some cause which led to a fall of the internal value of both good and bad coins relative to their value in foreign commerce and in industrial uses. He will have to understand that neither wear and tear nor clipping can have caused this relative depreciation. He will have to look for a cause which either increased the relative supply or decreased the relative demand for coins and their substitutes in internal circulation. One need merely read the usual accounts of the events during the 'Kipper and Wipper' period (1621-1623) in Germany, or of those preceding the English re-coinage of 1696, in order to see how easy it is to go wrong without some knowledge of monetary theory. Like most of the theory which is likely to be useful to the historian, it is only very simple and elementary theory which is required; and the usual conception of Gresham's Law is a very good illustration of how theory may and how it will not help the historian." Hayek (1962: ch. 24).

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