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

by Robert Mundell
Nobel Prize for Economics, 1999

 

1. Early Expressions

We can begin this discussion of Gresham's law by outlining some of the highlights of its history. Twenty centuries before Sir Thomas Gresham was born, the elegaic poet, Theognis, born in Megara near Athens, writing in the late 6th and early 5th century BC, wrote some lines suggesting Gresham's Law. Theognis has been described as "an eloquent and strongly biased witness of the struggle of the old aristocracy, for its traditional ideas and ideals which were partly adopted and partly destroyed by the rising lower classes.(1) In a book called Maxims written for his beloved Cyrnus, he informs us that "alloyed gold and silver is easily detected by a shrewd man."(2) More to the point is an earlier comment: "Nor will anyone take in exchange worse when better is to be had."(3)

From Theognis, we turn nearly a century later to Aristophanes (450-385 BC). In The Frogs he wrote: "the full-bodied coins that are the pride of Athens are never used while the mean brass coins pass hand to hand."(4) The idea must have been widely known because the illustrious playwright was able to assume that his audience was aware that the law applied also to politicians (bad politicians drive out good!). It was hardly a novel idea at that time.(5)

What was the condition of the Athenian monetary system that led Aristophanes to this insight? The Frogs was written in 405 BC, in the closing years of the Peloponnesian Wars. From 413 BC onwards, the Spartans had occupied Decelea(6) north of Athens and cut off the supply of silver from the Laurium mines. In 407 BC, confronted with a dire threat to the Athenian fleet and an empty treasury, the Athenians had recourse to melting the gold in some of the statues in the Acropolis to make emergency coins. Eight statues of Nike,(7) the god of Victory, on the Acropolis had been clad with two talents of gold each, to be removed in case of emergency. The gold was thus struck into coin.(8) (One statue survived and the tools used to produce the coins were subsequently dedicated in the Treasury to Athena.) In the next year, copper coins were issued on the credit of the state as replacement for silver coinage, and it "is a modern inference that the emergency coinage was of copper plated by silver."(9)

Aristophanes' anticipation of Gresham's law in The Frogs was by no means his only reference to monetary matters. A new use of small coins gave Aristophanes an occasion to raise a laugh: "It was customary to hold them in the mouth for safe-keeping, and in The Wasps (lines 790-1) Philocleon pops fish scales into his mouth, thinking they are coins. When he goes home with his jury pay under his tongue, his daughter (lines 608-9) manages to get it away from him in a welcoming kiss! Uelpides (The Birds, 503) swallows an obol by mistake."(10) In The Peace, Aristophanes has the maker of sickles say that the advent of the brief peace in 421 BC had made the price of sickles soar, while the maker of helmet crests complains that the peace has ruined him.(11) In another instance, he makes fun of the Athenian "Coinage Decree" which attempted to establish the Attic standard on all its allied cities.(12)

There seemed to be recognition of the principle underlying Gresham's Law during the Middle Ages. It was explicitly developed in Oresme's De Moneta. Written in the middle of the 14th century, this was the most important work on the theory of money before Bodin's and Grimaudet's writings in the 1570s. Nicholas Oresme (1320-1382) was the Norman Bishop of Lisieux who made contributions to theology, mathematics and astronomy besides his work on money. His De Moneta laid stress on the rights of the public with respect to currency and the great evils associated with debasement and devaluation, a courageous performance in view of the fact that it was written during the reign of John the Good (1350-1364) who devalued eighty-six(13) times! Oresme had a clear statement of what we call Gresham's Law. There is sufficient proof, however, that the idea was fairly well-known in the 14th century; its essence appeared in petitions addressed to the parliaments of Edward III and Richard II.

In the Renaissance, John Hales (d. 1571) is probably the first writer to elaborate on the proposition, assuming he was the author of A discourse on the Common Weal of this Realm of England. This rich work contains the following explicit statement of Gresham's Law:

"Was there not made proclamations that the olde coyne, specially of golde, should not be current here above such a price: was not that the rediest way to dryve away our golde from us. Everything will go where it is most esteemed, and therefore our treasure went over in heapes."(14)

At long last we arrive at Gresham! Thomas Gresham(15) was born in London in 1519 and lived through the reigns of four monarchs (not counting Queen Jane) until 1579. He was the second son of Richard Gresham, who already had an important business and banking house in Milk Street and had the distinction of being Lord Mayor of London in 1537. Thomas was educated at Gonville Hall, Cambridge, apprenticed to his uncle Sir John Gresham, also a merchant, and admitted to membership in the Mercers' company in 1543. Upon his father's death, he inherited the business and transferred the bank to Lombard Street, then the heart of London's business world. His immense ability was apparent early and in 1551 or 1552 he became royal agent or king's factor at Antwerp,(16) which he retained with few intervals under Edward the Saint, Bloody Mary and the Virgin Queen until 1574. His initial task was to raise large sums of money for the king, and to maintain a rate of exchange favorable to English currency, keeping watch on the money market and pledging his own credit when it was necessary. The information he provided to England about market conditions was invaluable and upon the ascension of the fiercely Catholic Mary he proved indispensable despite his Protestant convictions.

On Mary's death, Gresham advised Elizabeth on how to restore the base money, to contract as little foreign debt as possible, and to keep up her credit especially with English merchants. He later taught her how to make use of these merchants when political troubles in the Netherlands curtailed her foreign resources; at his suggestion, the Merchant Adventurers and Staplers were forced by detention of their fleets to advance money to the state; but as they obtained interest at 12 percent instead of the legal maximum of 10 percent, and the interest no longer went abroad, the transaction proved advantageous to all parties and increased Gresham's favour. In 1559 he was sent as ambassador to the Duchess of Parma, who was regent of the Netherlands and it was on that occasion that he was knighted.

Gresham had the wide interests fitting to "the greatest merchant in London." He was a banker and goldsmith, with a shop in Lombard Street, as well as a mercer; but he was a considerable country gentleman besides, with estates, chiefly in Norfolk, where his father had considerable property. He also had several country houses besides his house in Bishopsgate which he built and bequeathed to London as Gresham College.(17) He twice entertained Queen Elizabeth as his guest.(18)

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mkMichael J. Kosares, the author of these articles, has more than 40 years experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views, Forecasts, Commentary & Analysis on the Economy and Precious Metals," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

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