Denationalisation of Money: The Argument Refined

It is a misunderstanding of what is called Gresham’s law to believe that the tendency for bad money to drive out good money makes a government monopoly necessary. The distinguished economist W. S. Jevons emphatically stated the law in the form that better money cannot drive out worse precisely to prove this. It is true he argued then against a proposal of the philosopher Herbert Spencer to throw the coinage of gold open to free competition, at a time when the only different currencies contemplated were coins of gold and silver. Perhaps Jevons, who had been led to economics by his experience as assayer at a mint, even more than his contemporaries in general, did not seriously contemplate the possibility of any other kind of currency. Nevertheless his indignation about what he described as Spencer’s proposal

‘that, as we trust the grocer to furnish us with pounds of tea, and the baker to send us loaves of bread, so we might trust Heaton and Sons, or some of the other enterprising firms of Birmingham, to supply us with sovereigns and shillings at their own risk and profit’,1

led him to the categorical declaration that generally, in his opinion, ‘there is nothing less fit to be left to the action of competition than money’.2

It is perhaps characteristic that even Herbert Spencer had contemplated no more than that private enterprise should be allowed to produce the same sort of money as government then did, namely gold and silver coins. He appears to have thought them the only kind of money that could reasonably be contemplated, and in consequence that there would necessarily be fixed rates of exchange (namely of 1:1 if of the same weight and fineness) between the government and private money. In that event, indeed, Gresham’s law would operate if any producer supplied shoddier ware. That this was in Jevons’s mind is clear because he justified his condemnation of the proposal on the ground that

‘while in all other matters everybody is led by self-interest to choose the better and reject the worse; but in the case of money, it would seem as if they paradoxically retain the worse and get rid of the better’.3

What Jevons, as so many others, seems to have overlooked, or regarded as irrelevant, is that Gresham’s law will apply only to different kinds of money between which a fixed rate of exchange is enforced by law.4 If the law makes two kinds of money perfect substitutes for the payment of debts and forces creditors to accept a coin of a smaller content of gold in the place of one with a larger content, debtors will, of course, pay only in the former and find a more profitable use for the substance of the latter.

With variable exchange rates, however, the inferior quality money would be valued at a lower rate and, particularly if it threatened to fall further in value, people would try to get rid of it as quickly as possible. The selection process would go on towards whatever they regarded as the best sort of money among those issued by the various agencies, and it would rapidly drive out money found inconvenient or worthless.5 Indeed, whenever inflation got really rapid, all sorts of objects of a more stable value, from potatoes to cigarettes and bottles of brandy to eggs and foreign currencies like dollar bills, have come to be increasingly used as money,6 so that at the end of the great German inflation it was contended that Gresham’s law was false and the opposite true. It is not false, but it applies only if a fixed rate of exchange between the different forms of money is enforced.

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7 W. S. Jevons [34], p. 64, as against Herbert Spencer [57].

8 Jevons, ibid., p. 65. An earlier characteristic attempt to justify making banking and note issue an exception from a general advocacy of free competition is to be found in 1837 in the writings of S. J. Loyd (later Lord Overstone) [38], p.49: ‘The ordinary advantages to the community arising from competition are that it tends to excite the ingenuity and exertion of the producers, and thus to secure to the public the best supply and quantity of the commodity at the lowest price, while all the evils arising from errors or miscalculations on the part of the producers will fall on themselves, and not on the public. With respect to a paper currency, however, the interest of the public is of a very different kind ; a steady and equable regulation of its amount by fixed law is the end to be sought and the evil consequence of any error or miscalculation upon this point falls in a much greater proportion upon the public than upon the issuer.’ It is obvious that Loyd thought only of the possibility of different agencies issuing the same currency, not of currencies of different denominations competing with one another.

9 Jevons, ibid., p. 82. Jevons’s phrase is rather unfortunately chosen, because in the literal sense Gresham’s law of course operates by people getting rid of the worse and retaining the better for other purposes.

10 Cf. Hayek [30] and Fetter [17a].

11 If, as he is sometimes quoted, Gresham maintained that better money quite generally could not drive out worse, he was simply wrong, until we add his probably tacit presumption that a fixed rate of exchange was enforced.

12 Cf. Bresciani-Turroni [7], p. 174: ‘In monetary conditions characterised by a great distrust in the national currency, the principle of Gresham’s law is reversed and good money drives out bad, and the value of the latter continually depreciates.’ But even he does not point out that the critical difference is not the ‘great distrust’ but the presence or absence of effectively enforced fixed rates of exchange.

• 1W. S. Jevons [34], p. 64, as against Herbert Spencer [57].
• 2Jevons, ibid., p. 65. An earlier characteristic attempt to justify making banking and note issue an exception from a general advocacy of free competition is to be found in 1837 in the writings of S. J. Loyd (later Lord Overstone) [38], p.49: ‘The ordinary advantages to the community arising from competition are that it tends to excite the ingenuity and exertion of the producers, and thus to secure to the public the best supply and quantity of the commodity at the lowest price, while all the evils arising from errors or miscalculations on the part of the producers will fall on themselves, and not on the public. With respect to a paper currency, however, the interest of the public is of a very different kind ; a steady and equable regulation of its amount by fixed law is the end to be sought and the evil consequence of any error or miscalculation upon this point falls in a much greater proportion upon the public than upon the issuer.’ It is obvious that Loyd thought only of the possibility of different agencies issuing the same currency, not of currencies of different denominations competing with one another.
• 3Jevons, ibid., p. 82. Jevons’s phrase is rather unfortunately chosen, because in the literal sense Gresham’s law of course operates by people getting rid of the worse and retaining the better for other purposes.
• 4Cf. Hayek [30] and Fetter [17a].
• 5If, as he is sometimes quoted, Gresham maintained that better money quite generally could not drive out worse, he was simply wrong, until we add his probably tacit presumption that a fixed rate of exchange was enforced.
• 6Cf. Bresciani-Turroni [7], p. 174: ‘In monetary conditions characterised by a great distrust in the national currency, the principle of Gresham’s law is reversed and good money drives out bad, and the value of the latter continually depreciates.’ But even he does not point out that the critical difference is not the ‘great distrust’ but the presence or absence of effectively enforced fixed rates of exchange.
• 7‘that, as we trust the grocer to furnish us with pounds of tea, and the baker to send us loaves of bread, so we might trust Heaton and Sons, or some of the other enterprising firms of Birmingham, to supply us with sovereigns and shillings at their own risk and profit’,
• 8led him to the categorical declaration that generally, in his opinion, ‘there is nothing less fit to be left to the action of competition than money’.
• 9‘while in all other matters everybody is led by self-interest to choose the better and reject the worse; but in the case of money, it would seem as if they paradoxically retain the worse and get rid of the better’.
• 10What Jevons, as so many others, seems to have overlooked, or regarded as irrelevant, is that Gresham’s law will apply only to different kinds of money between which a fixed rate of exchange is enforced by law. If the law makes two kinds of money perfect substitutes for the payment of debts and forces creditors to accept a coin of a smaller content of gold in the place of one with a larger content, debtors will, of course, pay only in the former and find a more profitable use for the substance of the latter.
• 11With variable exchange rates, however, the inferior quality money would be valued at a lower rate and, particularly if it threatened to fall further in value, people would try to get rid of it as quickly as possible. The selection process would go on towards whatever they regarded as the best sort of money among those issued by the various agencies, and it would rapidly drive out money found inconvenient or worthless. Indeed, whenever inflation got really rapid, all sorts of objects of a more stable value, from potatoes to cigarettes and bottles of brandy to eggs and foreign currencies like dollar bills, have come to be increasingly used as money, so that at the end of the great German inflation it was contended that Gresham’s law was false and the opposite true. It is not false, but it applies only if a fixed rate of exchange between the different forms of money is enforced.
• 12With variable exchange rates, however, the inferior quality money would be valued at a lower rate and, particularly if it threatened to fall further in value, people would try to get rid of it as quickly as possible. The selection process would go on towards whatever they regarded as the best sort of money among those issued by the various agencies, and it would rapidly drive out money found inconvenient or worthless. Indeed, whenever inflation got really rapid, all sorts of objects of a more stable value, from potatoes to cigarettes and bottles of brandy to eggs and foreign currencies like dollar bills, have come to be increasingly used as money, so that at the end of the great German inflation it was contended that Gresham’s law was false and the opposite true. It is not false, but it applies only if a fixed rate of exchange between the different forms of money is enforced.