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

by Robert Mundell
Nobel Prize for Economics, 1999

Editor's note: Herewith, Nobel laureate Dr. Robert Mundell makes his second appearance at the Gilded Opinion. The highly influential Columbia University economist is well-known to our readers for his reservations about fiat money and his advocacy of a gold component in monetary systems, including circulating gold coinage. But he also has written voluminously on a wide range of other topics. As early as 1961, Mundell proposed reducing tax rates and improving monetary discipline as the best means to achieve greater and more stable economic growth. His theories on this subject led to the Kennedy tax-cuts, which propelled the U.S. economy of the 1960s and later became the supply-side basis for much of Reaganomics.

Mundell also wrote early on of the constant realignment problems which would attend a world monetary system of free-floating currencies. His prescient work on the desirability of regional currencies was, in fact, fundamental to the creation of the euro. When Mundell was awarded the 1999 Nobel Prize for economics, Princeton University economist Peter Kenen said, "Bob was modeling the world of the 1990s through the work he did in the 1960s."

In Uses and Abuses of Gresham's Law in the History of Money, Robert Mundell leads us on a lengthy examination of the many centuries of missteps and official monkey business as they applied to the relationship between money and gold. Our thanks go to this very influential man for his permission to reprint the work here in its entirety.

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Uses and Abuses of Gresham's Law in the History of Money Paper prepared for publication in the Zagreb Journal of Economics, Volume 2, No. 2, 1998.

Introduction

The economist H. D. Macleod, writing in 1858, first brought attention to the law that he named after Sir Thomas Gresham:

No sooner had Queen Elizabeth ascended the throne, than she turned her attention to the state of the currency, being moved thereto by the illustrious Gresham, who has the great merit of being as far as we can discover, the first who discerned the great fundamental law of the currency, that good and bad money cannot circulate together. The fact had been repeatedly observed before, as we have seen, but no one, that we are aware, had discovered the necessary relation between the facts, before Sir Thomas Gresham.

This passage errs in two points: Gresham was not the first to make explicit the idea we now know as "Gresham's Law," and the assertion that "good and bad money cannot circulate together" is a glaring error. It is a far cry from Gresham's Law. That Macleod was careless about his statement of the law he named after Gresham serves as a warning that the ideas involved are more subtle than at first appears.

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