"Bad money drives good money off the market" is a cliche. More clarity comes from adding that both moneys must be declared equal by law. In that case, the markets will operate. People will break (avoid, evade, ignore) the law. The undervalued money will go into other channels (savings, export) and the cheaper overvalued money will circulate.
Social sciences attempt to mimic physical sciences with concise and precise laws about complicated phenomena. But, even astronomy is theoretically limited to a two-body universe. Add more bodies and the nice algebra of theory must give way to laborious numerical approximations. So, too, with economics. Gresham's Law applies to two currencies - say the silver dollar and the gold dollar; or to silver dollars of one standard versus minor coinage of another fineness. Reality is more complicated than that. As Hayek pointed out, a plethora of moneys circulate. Economists just focus on one or two issues of the government.
Unfortunately, lacking knowledge of numismatics, Hayek could not state his case empirically. The Austrian school is rationalist, deriving universal laws from a priori assumptions.
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| Spanish 8-reales "dollar" a world trade coin of the 18th and 19th centuries, this one chopnarked by Chinese merchants |
Many conservatives across the spectrum know that the US Silver Dollar was modeled on the Spanish 8 Reales of the 1780s. Fewer know that until 1857, Spanish money was one of about a dozen foreign currencies in silver and gold that were legal tender in America, alongside issues of the Federal government. Many banks of the time issued paper money that promised U.S. federal silver coin in redemption but showed pictures of Spanish and Mexican coins. (See Spanish Coins on American Notes here.)
From the beginning of the Federal Mint, there was always a push for alternate currencies to make daily commerce easier. The US ten-cent dime and 25-cent quarter dollar were not commonly convenient. Many people relied on worn Spanish pistareens or "fips." These were approximately half-reales (about 12-1/2 cents when full and new) but circulated at different values depending on circumstances. That is a basic lesson for economists: to see what people actually do, not to prescribe how they should conduct business.
In apparent violation of Gresham's Law, presenting a test case for hard money conservatives, the US Mint 3-cent silver and 3-cent nickel circulated side-by-side. The base metal coin did not drive the precious metal competitor from the market. The same was true of the US Mint 5-cent nickel versus the silver half-dime. The US Treasury also issued Fractional Paper, an emergency scrip from the Civil War that circulated alongside coinage, even after the apparent necessity was gone. People could have demanded hard money (as small silver coins), but they did not. The paper was good enough. Moreover, fractional coinage - and of course the paper - was a limited legal tender, typically good only for a dollar or two, maybe five, depending on the coins and the laws of the moment.
Like Europe of the Middle Ages, America also knew apparent "bullion famines" during which times coins were scarce. They left the country to buy goods from abroad. That is what money is for. At other times, with Americans goods being exported and business at home being brisk, merchants sold off their small change at a discount to get rid of the excess.
Eric P. Newman was president of the American Numismatic Society. With Kenneth Bressett, former president of the American Numismatic Association, Newman wrote The Fantastic 1804 Dollar. He is less famous generally but perhaps more highly honored among serious numismatists for his many explorations of Colonial and Early US paper money and his many monographs on other topics. According to one presentation, delivered at a Coinage of the Americas Conference, December 2, 1984, counterfeit copper coins of the colonial era circulated for over fifty years, into at least the late 1830s in the Appalachian villages of western Virginia. In Canada, these small copper conveniences are known as "blacksmith tokens."
Earlier this year, Bernard von Nothaus was convicted on federal charges for issuing his own Liberty Dollars. Any active American coin collector with a Red Book knows that private issues in gold and copper claim a long and proud history independent of the faltering efforts of the U.S. Mint. Private silver was unnecessary because of the masses of Spanish (and English, etc.) coins circulating at the time. We know from old records that into the 1830s many merchants in Boston, New York, etc., kept their books in Pounds-Shillings-Pence. Business with English partners was brisk; and traditions have strength.
The Pounds-Shillings-Pence system itself was a radical innovation, a conceptual leap, an epistemological creation that remains unappreciated by those who are ignorant of the history of trade and commerce. In the broad centuries we call the Middle Ages, any local authority with bullion could strike his (sometimes her) own coins. Much of it came from "plate" household goods of silver; much came from new mines. Easily a hundred different kinds of coins, struck to different standards, often of lower debased finenesses circulated. Broadly, the old Roman pound continued, while the new German mark ascended. To rationalize the chaos, bankers invented pounds-shillings-pence. It did not matter how you built up the quantities, when the books were balanced, you needed 240 pence or 20 shillings (12 pence each) to make a pound (or 12 "Troyez" ounces) of fine silver. Bankers in the Middle Ages invented abstract money of account to meet the demands of competing currencies.
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| Silver penny of Hughes of Champagne, about 1 gram: dameter of a dime. |
This was spontaneous order. No Dumbarton Oaks Agreement was needed. No theoretical papers were published. And no general law was enforced on all. The Big Problem of Small Change by Thomas J. Sargent and Francoise Velde is a chronicle of monetary media in the Middle Ages. As a time when Europe had perhaps a thousand independent polities, the stories carry meaning for anyone who wants to understand international monetary systems today. The work has been criticized by economics professors of the Austrian school for its larger (and largely questionable) theoretical framework, but as a compendium, it is unexcelled.
As I said in the previous post, there is no standard textbook in numismatics. No one-volume Samuelson makes life easy for freshmen. Nothing from any Foundation for Numismatic Education delivers "Numismatics in One Lesson" or the "The Cliches of Monetism." You can start with the Red Book, the Breen Encyclopedia, the Garrett Collection. But you will soon discover the new works from Whitman and Krause and Stanton. Numismatics is active and aware, curious about new facts, fascinated by new discoveries, open to new explanations of accepted evidence... and always being tested in the largest unregulated money market on Earth.
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| Quinarius of Cato the Younger struck at Utica. "Pro Per: for himself." His own silver financed republican resistance to Julius Caesar. |
ALSO ON NECESSARY FACTS
