THE MONEY PROBLEM

Chapter IX.

GRESHAM’S LAW



IF evidence be required to demonstrate the unscientific thought responsible for our monetary systems, we find abundant proof in the importance given to what is known as the Gresham Law during the past two centuries.  No theory in this branch of economic science is more frequently quoted, or more often appealed to, and yet its existence is entirely due to the fallacy which I have endeavoured to expose in the precious chapter, that money is a commodity.  The Gresham Law contains about as much truth as the astronomical theories of the Rev. Mr. Jasper.  Sir Thomas Gresham, the founder of the Royal Exchange, in the sixteenth century, observed that new coins rapidly disappeared from circulation, especially when the bulk of the coinage in circulation was light in weight.  He discovered that in exporting the precious metals, money changers invariably selected the new full weight coins ;  hence the light weight ones remained in circulation.  The persistency with which this occurred led Sir Thomas to formulate what has ever since been known as Gresham’s Law, viz., “Bad money drives out good money, but good money cannot drive out bad money.”  Consideration of this law makes one wonder whether monetary science is a branch of knowledge which conflicts with the fundamental law of natural philosophy, viz., the survival of the fittest.  Let us consider the subject closely.  If we analyze a coin we shall find it composed of a certain quantity of metal, moulded into a certain form and stamped with an inscription on each side.  As a piece of metal it is merely a commodity.  The inscription gives it the credit of the bank or government.  Wherein does the money consist ?  In the nation’s credit or in the metal contained in the coin ?  What causes it to be generally received, to circulate throughout the community ?  If I take a hammer, and, avoiding the loss of any of the metal, I deface the inscription so that it is unrecognizable, the coin will not circulate.  No one will receive it on the same terms as before the inscription was defaced, notwithstanding that as a piece of metal it remains of precisely the same worth.  I am compelled to send it to the mint and have the inscription renewed, or sell it to a gold or silver merchant as a commodity.  The efacement of the inscription has reduced the coin to a mere commodity.  The money is destroyed.  Does anyone doubt this fact ?  If so, let him take a piece of gold of the same quantity, quality and shape as a five dollar gold piece or sovereign, and omitting the inscription, let him try to use it as money.  He may put even more gold into it than is in the coin.  No one but a gold merchant will accept it, and then only as a commodity.*  He will buy it just as he would buy tea, coffee or any other commodity.  What, then, is the meaning of the phenomenon, viz., the disappearance of the largest and fullest weight coins ?  Merely this, that the tendency of commerce and of industry is towards cheapness, towards the destruction or abolition of value—as used in the commercial sense.**  It is founded upon the economic law that men seek to gratify their wants with the least expenditure of energy, a law that corresponds to the line of least resistance in mechanics.  Consequently, of two things, both equally well adapted to fulfil a certain function, the cheaper one will be selected.  For this reason iron has superseded brass and wood, and steel has taken the place of iron in many of the arts.  For this reason iron itself will be displaced as soon as mankind finds a cheaper material capable of performing the same duties.  For this reason, too, coins of short weight stay at home, and those of full weight go abroad.  For this reason, were it not for the interference of governments, and for legislative enactments, gold and silver would be relegated to the arts to which they properly belong, and the cheapest and best form of money, paper, would be universally adopted.  The Gresham Law is a thorough demonstration of the fact that the ability of money to perform its duties is a function which a commodity is incapable, as a commodity, of performing.  In commerce, as in mechanics, the utility of an invention is determined by its ability to discharge the functions for which it was invented.  As Francis Walker says : “ Money is that money does.”

Now, knowledge of the fact that when two kinds of coins were put in circulation, the one circulated freely whilst the other refused to do so, would lead to the inevitable conclusion that that which circulated was the better money, i.e., better adapted for the work required ;  for what is the work required of money unless to circulate freely ?  Money is to trade what wheels are to a car, a means of facilitating its progress.  Of what possible use would a wheel be to a car that refused to revolve ?  And yet we are gravely informed that money which will not circulate is the best money !  Gresham’s Law is, therefore, an absurd and ridiculous fallacy.  Good money will always drive out bad money.  The cause of the “picking and culling” of gold and silver coins is this, that when coins function as money, they are not, properly speaking, commodities ;  as metals, they are ;  and coins, like everything else, obey the highest law of their being.  This law is that they seek the sphere wherein they can perform the functions of that office for which they are best adapted ;  and this is the law of the survival of the fittest, a law which Gresham’s theory contradicts.  As coins, they are of less value than mere commodities.  Their money functions are subordinate to their commodity function.  But now, it may astonish “ Greshamites” to learn that, as a matter of fact, money never goes abroad.  It is the commodity that emigrates.  Coins are sent abroad as bullion, not as money.  They are sent to foreign mints and re-coined or sold to exchangers.  We may sum up the matter as follows :  Commodity-money is the subject of two powers, one governing it as a medium of exchange, the other as a commodity.  The question as to whether a coin will perform the money function well or ill, whether it will circulate or not, is dependent upon whether its commodity worth is greater or less than its money worth.  Any money that is tied to a commodity is, therefore, bad money, in the sense of not being reliable in performing the money functions when it is needed.  Good money is of that nature that at all times it obeys the law of its being and is subjected to no other law.

Gresham’s Law shows further that the natural tendency of money is to dissociate itself from the commodity.  A coin short in weight circulates where the full weight one cannot.  The commodity begins to disappear from the moment a coin is started on its course.  Either it disappears per saltum, or else it is gradually worn away by abrasion.  The loss from use is in itself evidence of the unwisdom of allowing money to carry the wealth of which it should be merely the representative, with it.  It is handicapped from the start.

We can now see the absurdity of striving to make money a commodity, or in associating it with a commodity.  Subjected as it must be to two conflicting forces, it cannot well perform the money function so long as it is exposed to the force acting upon it as a commodity.  Gresham’s Law shows that as commodities, gold and silver refuse to perform the money function ;  they will not serve as money.  It is only when their commodity forms disappear, are lost sight of, that they properly fulfil the function of a medium of exchange.  Gresham’s Law should, therefore, be amended, in order to become truthful, as follows “ Cheap money is the best money and drives out dear money,” which means that the cheaper the material of which the money is composed, the better.

Of course, in order to be money, it must properly fulfil the duties required.  Cheap money, therefore, does not mean poor money, i.e. inability to discharge the money function.  Iron is cheaper than gold, but an iron bridge is infinitely preferable to one of gold.  A locomotive constructed of steel, iron and brass, is cheaper than one built of gold and silver, but no one need be told that the former makes a better locomotive.  So long, then, as it performs satisfactorily the money work, cheap money is the best money, and must of necessity drive out dear money.




* “ Counterfeiters are flooding Cincinnati with spurious dollars of silver.  The curious feature of this illegal act is, that the counterfeit is said to be pure silver, and, therefore, of a better quality than the government furnishes as a legal tender.  The present market price of silver enables the counterfeiter to manufacture this superior coin and yet obtain for his labor a handsome profit.—Philadelphia Ledger, March 10th, 1894.
     “ An undergraduate of the University of Pennsylvania, who considers himself a practical joker, recently placed a five dollar gold piece on the tracks of the Reading Railroad, and after a train had passed over it, hammered it out of all shape, removing every trace of the die.  Then he took it around to purchasers of old gold, who tested it by weight and acid, and told him how much they would give for it.  The highest offer he received was seventy-five cents.—Philadelphia Record, Feb. 7th, 1894.

** I have dealt more fully with this subject in the Chapter on Value, viz., the constant tendency of industry—when free from governmental interference—to reduce the “ valuable ” to the merely useful.