Thursday, June 16, 2011

RM - Robert Mundell & Gresham law revisited

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

Robert Mundell
Columbia university
August 1998

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...."

[Mrt: and now the body .... the interesting part....(read, my usual advise)]

"12. Conclusions
Gresham's Law, properly understood, can be a powerful tool in the hands of historians for the study of monetary history. The catchy phrase, "bad money drives out good," is not a correct statement of Gresham's Law nor is it a correct empirical assertion. Throughout history, the opposite has been the case. The laws of competition and efficiency ensure that "good money drives out bad." The great international currencies--shekels, darics, drachmas, staters, solidi, dinars, ducats, deniers, livres, pounds, dollars--have always been "good" not "bad" money."...

 "...Our discussion has been confined to the literal subject matter of Gresham's Law, i.e., its applications to the money sphere. It is of course a completely general law that holds whenever the isomorphism that constitutes its theoretical content applies. As Aristophanes knew as well as we, bad politicians drive out good, cheap conversation drives out dear, bad theory drives out good; cheap gifts drive out dear, bad food drives out good, and so on indefinitely. In each case the qualification must be made that from one standpoint (e.g., acceptability) good and bad have the same value...."

[Mrt: will be revisited and relevant freegold parts extracted]

Source: Uses and Abuses of Gresham's Law in the History of Money (does not open straight, search)

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