Principles of Political Economy

by Arthur Latham Perry

Aristophanes, the Greek comic poet, in the 5th century before Christ, seems to have been the first writer who noticed that good coins of full weight are apt to be crowded out of the circulation by the lighter and poorer pieces, and he, mistaking the cause of this, satirized his countrymen unmercifully for preferring bad coins to good, and demagogues, like Cleon, to honorable citizens for rulers. The following are the verses:—

"Oftentimes have we reflected on a similar abuse,
In the choice of men for office, and of coins for common use;
For your old and standard pieces, valued and approved and tried,
Here among the Grecian nations, and in all the world beside,
Recognised in every realm for trusty stamp and pure assay,
Are rejected and abandoned for the trash of yesterday;
For a vile, adulterate issue, drossy, counterfeit, and base,
Which the traffic of the city passes current in their place!
And the men that stood for office, noted for acknowledged worth,
And for manly deeds of honor, and for honorable birth;
Trained in exercise and art, in sacred dances and in song,
All are ousted and supplanted by a base, ignoble throng;
Paltry stamp and vulgar metal raise them to command and place,
Brazen counterfeit pretenders, scoundrels of a scoundrel race,
Whom the State in former ages scarce would have allowed to stand
At the sacrifice of outcasts, as the scapegoats of the land."

Sir Thomas Gresham, financier of Queen Elizabeth and founder of the Royal Exchange and of Gresham College in London, was the first thinker to understand fully and explain scientifically what Aristophanes and others had noticed as a fact, and what in its explanation may hence properly be called "Gresham's Law." We will append a few historical illustrations of the fact and the law as instructive in many ways.

(a) The City of Amsterdam founded its famous Bank in 1609, because no other way seemed to open of preventing the clipped and worn foreign coins then and for a long time circulating in that great Mart of Trade from driving out completely the good money of full weight, which the Mint of the City had been constantly pouring in. The Bank was devised as a municipal Institution with this intent; it was a Bank of Deposit only; it took in all the old coins at their bullion value only; and then had them reminted at full weight; it gave the depositors credit on its books in the terms of the new money for all of the old they chose to bring in; it then adjusted accounts between merchants and all other of its customers by mere transfers on its books; the City required all debts falling due in Amsterdam to be paid in the new "bank-money," which took away all uncertainty from Bills of Exchange drawn on Amsterdam, which were previously liable to be paid in the clipped and worn coin, and were therefore sometimes at as much as 10% discount in other cities; this simple requirement brought these foreign bills to par, and kept them there; the full-weighted money now stamped by the city Mint abode in the circulation, being now the sole Measure of Services there; and thus it became the interest and convenience of every business man in Amsterdam to have these simple dealings with the Bank, which in turn enjoyed unlimited credit in the commercial world for almost two hundred years.

(b) The great English Recoinage of 1696 was completed under the imperatives of Gresham's Law. Graphically does Macaulay describe the causes and the effects of this in his 21st Chapter. The old silver coins had been stamped under the hammer; few of them were perfectly circular; the edges were neither milled nor fluted; the legend was not so near the edge as that the letters were impaired by a little clipping; it was easy to pare off a pennyworth or two, and then pass the coins along; it was profitable to do it, and in vain that Elizabeth enacted that the clipper must suffer the penalties of high treason; nearly all the coin of the realm became mutilated, and about 1660 a new process of coinage was brought in. A mill worked by horses fabricated the new coins on better principles. They were exactly round, and the edges were inscribed with a legend, and they were all of just and equal weight. They were thrown out to pass current with the hammered money, and it seems to have been expected that they would soon come to displace it. But they did not. Both were received at first without distinction by the individual traders and by the public tax-gatherers. But the milled money soon came to be scarce, and the old money grew constantly worse. The lighter the old coins became, the scarcer became the new ones; for who would pay two ounces of silver when one ounce was legal tender? The new money was melted, was exported, was hoarded, but circulate it would not. At length the lightest pieces began to be refused by some people, and other people demanded that their silver should be paid to them by weight and not by tale, and there was wrangling over every counter, and a dispute at every settlement, and the coin was really so diverse in its value that there was no longer any measure of value in the kingdom; business was in utmost confusion, society was by the ears, poor people were unmercifully fleeced, and shrewd ones grew enormously rich; and the Jacobites secretly exulted in the hope of being able to avail themselves of the prevailing discontent to overthrow the scarcely established revolutionary government of William and Mary; when, by the joint counsels of two such philosophers as Locke and Newton, and two such statesmen as Somers and Montague, the government took the bold resolution of recoining all the silver of the kingdom. An early day was fixed by Parliament after which no clipped money could pass except in payments to Government, and a later day after which it could not pass at all.

(c) Gresham's Law has had beautiful illustrations in the monetary history of the United States. We have already seen the reason why the first silver dollars of 1794 could not compete in currency with the gold coins of 1795,—the silver was under-valued in the legal ratio 1:15,—it would have been much nearer the European market at 1:15.5. There was another reason operative in the same direction from the beginning, which did not, however, come to the notice of the Government till ten years later. Only 321 silver dollar-pieces were coined in the year 1805; and May 1, 1806, there stands an order from President Jefferson to the Director of the Mint,—"that all the silver to be coined at the Mint shall be of small denominations, so that the value of the largest pieces shall not exceed half a dollar." The presidential reason given for this order is,—"that considerable purchases have been made of dollars coined at the Mint for the purpose of exporting them, and that it is probable that further purchases and exportations will be made." The coinage of silver dollars thus suspended was not resumed for 30 years. What was the matter with these dollars? Nothing, only they were too valuable. Hamilton had adopted for his new dollar the exact weight in fine silver of the normal Spanish-Mexican dollar, then and for a long time the unit of the thriving West India commerce; clipped and worn coins of this popular stamp had slipped into circulation in large numbers throughout the United States, and driven out the new and good pieces in accordance with a principle much better understood now than then; the President's order itself was not very intelligent, inasmuch as two halves, four quarters, or ten dimes, were then equal in weight and purity with the dollar-pieces, and as a matter of fact were almost (if not quite) equally driven out by the smaller Spanish-Mexican coins. The "four-pences" and "nine-pences" ("York shilling") of that coinage were almost exclusively the small change of New York and New England during the first half of this century. The "dimes" and "half-dimes" of our own mintage, though long legalized, were but slowly naturalized. The coin-changes of 1853, already described, gave a fair chance for the first time to our smaller silver coins.

The last native illustration of Gresham's Law will force us to anticipate here the discussion under the next numerical heading, so far as to assume that there is such a thing as paper money, and that the Law now in hand works in connection with that as well as with diverse forms of metallic money. In 1862, Treasury notes, commonly called Greenbacks, made a legal tender for debts though not bearing interest, were issued by the national Government to the amount of $450,000,000. Of course, under these circumstances they depreciated in value as compared with the gold dollars, which gold dollars they were unfulfilled promises to pay. Just so soon as the greenback dollars fell fairly below the gold dollars in value, the latter left the channels of trade in a very few days' time. Down sank the greenbacks gradually below the subsidiary silver coins in value, and the latter obediently and utterly abandoned the commercial field. At last the greenbacks went down even below the level of the copper cents, which at that time cost the government about half a cent each, and this invariable law of money swept the circulation bare of coppers, and the people had to resort for their smallest change to postage-stamps and shin-plasters and other abominations. Happily, the country survived to see these processes exactly reversed, and the old law confirmed on its other side. When, after a considerable interval, the paper dollar appreciated to the proper height, it was interesting to watch the copper cents put in a prompt re-appearance; after a still larger appreciation of the paper, back came in abundance the subsidiary silver; and as the day of the redemption of the paper drew near, silver dollars and gold dollars greeted smilingly their old acquaintances of the street.

13. So far we have treated only of Coin-Money in its two forms, substantive and subsidiary. The latter may now be dismissed as of little consequence in itself, and as already elucidated fully: the latter is the only Money that stands in its own right as a commodity, and the only Money that can give birth to the Denominations of Value, such as sovereigns, dollars, marks, and francs. What is a Dollar? A dollar is 25⁴⁄₅ grains of a metal compound coined, of which nine parts are pure gold and one part a hardening alloy. It is a definite quantity of a thing definitely and legally described. It is a visible and tangible and well-known commodity. Government is competent, if it pleases, to alter the quantity of gold that shall constitute a dollar, although the People will quickly and roughly readjust the prices of Services to a changed measure of them; it is competent even to make a dollar out of silver, as our Government has tried to do (for the most part vainly) for a century, though it is not competent to cause both dollars to circulate as such at the same time; but civilized and advanced Governments are not practically competent to make a Dollar out of anything else than gold and silver.

Money is a current and legal Measure of Services; for the end and in the way in which Money alone originates and becomes current its material must be a valuable commodity; and after centuries of experiments and exclusions no civilized People now tolerate any other commodity in this relation than gold or silver. Such a selected commodity becoming in the manner already explained an actual medium passing from hand to hand in Exchanges, impresses its name on the minds of men as an ideal measure of services, which measure they can use, and do constantly use, without handling at the time the commodity itself. But these ideal-dollars, these denomination-dollars, need to be kept in check by a constant recurrence to actual, palpable thing-dollars. The denomination only comes into existence in connection with the use of the thing, cannot possibly exist independently of it, and needs constantly to be reduced to it (as it were by actual contact) in order to be useful as a measure. Just as men talk about inches, and calculate by inches, in thousands of cases in which no actual inch is used as a measure, and in every case of doubt, dispute, or difficulty have recourse to the actual inch, and thus the ideal inch is kept steady in the minds of men by frequent reference to the outward standard; so the mental measure of services, which men insensibly acquire from the use of the objective measure, needs to be kept true by actual and frequent contact with that measure.

But besides this Thing-Dollar and its Denomination, which always go together like a man and his shadow, there is one other kind of Money, namely, the Promise-Dollar. We must now attend to this. What is a Dollar-Bill? How does it read? It is always a Promise of some Issuer to pay to bearer One Dollar, that is to say, this legal and definite quantity of a precious metal. There is no mystery here. There can be none. A Dollar is a tangible and weighable commodity. A Dollar-Bill is a Promise to render this commodity to bearer on demand. The difference is the same in kind as that between a bushel of corn and a man's promise to his poor neighbor to give him a bushel if he will come for it. It depends on the man, on his ability and character, how much the corn-promise is worth; and so it depends on the issuer, on his ability and character, how much the coin-promise is worth. The Issuer may be of such standing as to be able to secure for his promises that they become "a current and legal measure of Services"; and if so, they become Money under the definition.