Monday, April 9, 2012

Gresham’s (or was it Aristophanes’) Law

This city, it often seems to me,
That’s how we treat our finest citizens,
treats our best and worthiest citizens
the nobly born, our righteous men,
the way it does our old silver coins,
our best and brightest, the ones well trained
our new gold ones, as well. This money
in music and the dance at the palaestra.
was never counterfeit—no, these coins
Instead we use foreign bronze for everything—
appeared to be the finest coins of all,
useless men from useless fathers, red heads,
the only ones which bore the proper stamp. 
men who’ve come here very recently—
Everywhere among barbarians and Greeks
the sort the city at its most negligent
they stood the test. But these we do not use.
would never use in earlier days,
Instead we have our debased coins of bronze,
not even as a scapegoat.
poorly struck some days ago or yesterday.
     Aristophanes, The Frogs

Gresham’s law, attributed to the British financier Thomas Gresham (1519-1579), is complicated to explain in an age when we use paper money we can’t exchange for gold. So is the history of this law. But the concept first. To sum it up, if two currencies are present, the “bad” money will drive the “good” money out of circulation. So what is bad money? It’s money artificially overvalued, thus valued by government fiat. Supposing the currency is gold but the government introduces silver to increase the money supply and sets the value of the new coinage in such a manner that the silver coins required to obtain one gold coin aren’t actually worth what gold coin would fetch as gold. We’ve come a long ways since. In this day and age debasing the currency is handled in a much more sophisticated way. The money supply is increased simply by printing more money—the effect of which is to reduce the purchasing power of bills in circulation or held in virtual form in banks. The result is essentially the same.

The history is also interesting. According to a modern-day scholar, George Selgin, Gresham never framed such a law. It was done by the economist Henry Dunning McLeod (1821-1902). But long before McLeod “borrowed” a famous name, the same concept had been articulated by no less a figure than Copernicus (1473-1543), before him by philosopher Nicole Oresme (1320-1382) and a Muslim contemporary of his, Al-Maqrizi (1364–1442), who wrote about the Mamluk dynasty—which inflated its economy by stamping out huge quantities of copper coinage.

And, as my quote shows, Aristophanes (446 BC-386 BC) came in even earlier. It delighted me, therefore, to discover that the first framer approached the subject as I did this morning in looking up this law. Aristophanes enlarged the concept, in framing it, to the wider view of human affairs, commenting, as it were, on politics and on pop culture. What goes around, comes around—but what comes around may not have the same value as what had gone around.

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