Sir Thomas Gresham¶
Sir Thomas Gresham (1519–1579) was an English merchant, financier, and economist who served as advisor to Queen Elizabeth I. Though Gresham's Law bears his name, Nicolaus Copernicus actually described the principle first. Nevertheless, Gresham's articulation of monetary dynamics to the English Crown and his diagnosis of England's currency crisis secured his place in economic history.
Advisor to the Crown¶
Sir Thomas Gresham served as financial advisor to Queen Elizabeth I during a period of severe monetary instability. This crisis had its roots in the reign of Elizabeth's father, Henry VIII, who had systematically debased English coinage to fund his lavish lifestyle and military campaigns.
The Great Debasement¶
By the time Elizabeth assumed power, England's monetary system was in chaos. Gresham characterized the economy as being in an "unexampled state of badness." His explanation was straightforward: "all your fine gold was conveyed out of this your realm."
This situation resulted from Henry VIII's "Great Debasement," which began in 1542. Silver content in coins had dropped from 92.5% in 1544 to just 33% by 1549, with the remainder replaced by copper. "English merchants quickly discovered that the new silver groats had become debased and begun offering a lower price for them. The introduction of these debased coins caused coins at similar face value but with higher precious metal content to disappear from circulation, in line with what would become known as Gresham's law."
The Cure¶
Gresham proposed a solution: "that good and bad coin cannot circulate together." This insight—that a dual system of high-quality and debased currency would inevitably drive good money from circulation—became the principle forever associated with his name.
The cure Gresham proposed required purging debased coins from circulation and replacing them with sound currency. This was easier said than done. The Great Recoinage of 1696 represented an attempt to implement such a solution, though it failed financially and was abandoned after three years. It would take until the Great Recoinage of 1816—more than two centuries after Gresham's advice—before England fully implemented his recommendations.
The Law¶
Gresham's Law states that "bad money drives out good," meaning that in a market where two currencies are accepted as payment, the currency of lower value or inferior quality will circulate more widely than the currency of higher value or better quality.
There is an assumption behind Gresham's Law: "Bad money drives out good if they exchange for the same price. There are two manifestations of this: discrepancies in face value versus true value, and fixed exchange rates that create discrepancies between the true values of two currencies. The former is more prevalent with domestic money while the latter is natural with international trade."
Historical Applications¶
Numerous instances of Gresham's Law appear throughout history:
The Temple Moneychangers: "When Jesus wrecked the moneychangers' tables at the temple, that too was Gresham's Law at work. People were forced to pay their taxes in good money. This good money was purchased with bad money. But the rates to exchange bad money for good were exorbitant and did not reflect the value of the underlying metals."
American Colonies: Britain's Currency Acts and the requirement to pay taxes in British currency at disadvantageous exchange rates created the same dynamic, contributing to revolutionary sentiment.
Justinian II: The Byzantine emperor's refusal to accept debased dinars from the Umayyad Caliphate led to war, currency crisis, and the Twenty Years' Anarchy.
Priority Question¶
Though the principle bears Gresham's name, Copernicus articulated it first in his 1526 treatise Monetae Cudendae Ratio. Gresham was born in 1519, seven years before Copernicus published his monetary analysis. The naming convention reflects a common pattern in intellectual history: economic principles are often attributed to later, more visible figures rather than their true originators.
Legacy and Relevance¶
Despite both Copernicus and Gresham "getting it right," "kingdoms, governments, and banks would continue to debase their currencies, as well as assign arbitrary exchange rates to dual-currency systems, for centuries to come. Not one of these so-called leaders paid any mind to economic history."
Gresham's Law remains relevant to modern monetary policy. Its application to the American West's bimetallic standard problems, the CFA franc exploitation in Africa, and even Bitcoin: "Thier's Law is why people save, rather than spend, Bitcoin." When given free choice of which money to hold, people will hoard what they believe to be good money and spend what they believe to be bad money—exactly as Gresham described to Queen Elizabeth nearly five centuries ago.