Reversing Gresham’s Law: How Sound Money Could Drive Out Fiat
Gresham’s Law is an economic maxim that states “good money” drives out “bad money.” But under the right circumstances, it might be possible to reverse Gresham and do the opposite.
Named in 1857 by economist Henry Dunning Macleod after Sir Thomas Gresham, an English financier during the Tudor dynasty, Gresham’s law is technically a theory that people tend to hoard money that has higher intrinsic value, such as gold or silver, and spend money with lower intrinsic value, like devaluing fiat paper dollars.
This happens because people want to hold onto the money with more value, perceiving they will maintain or increase in value. In effect, they spend what they don’t want to keep.
This played out in practice when the federal government removed silver from quarters and dimes in 1964. Today, it is nearly impossible to find silver coinage in circulation.
In a paper presented at the Mises Institute, Constitutional tender expert Professor William Greene said the opposite could actually happen as well.
Reversing Gresham would likely require a legal environment that removes barriers to using sound money in everyday transactions, and incentivizes people to use it instead of what they currently use – rapidly depreciating government fiat.
State actions, including expressly making gold and silver legal tender in the state, repealing sales taxes and capital gains taxes on gold and silver, and establishing transactional currencies such as the Goldback take steps in that direction.
By removing legal roadblocks, these actions create an environment that incentivizes people to use gold and silver in daily transactions and push back against Federal Reserve monetary malfeasance.
Greene argued that when people in multiple states start using gold and silver in large numbers instead of Federal Reserve notes, it would effectively create a “reverse Gresham” scenario.
“Over time, as residents of the state use both Federal Reserve notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve notes do will lead to a ‘reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve notes).”
This would happen as people become aware of the fact that gold and silver purchasing power remains relatively constant, while it takes more and more fiat money to buy the same basket of goods.
Over time, the momentum would build as more and more people rejected government fiat.
“As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the state’s treasury, an influx of banking business from outside of the state – as people in other states carry out their desire to bank with sound money – and an eventual outcry against the use of Federal Reserve notes for any transactions.”
In effect, government fiat money would fall out of use, breaking the Fed’s monopoly on money.
Once things get to that point, Federal Reserve notes would become largely unwanted and irrelevant for ordinary people.
Reversing Gresham isn’t going to happen through action in Washington D.C. The federal government depends on the fiat system and the Federal Reserve’s monopoly on money to maintain its ability to borrow and spend.
The only way to create monetary competition and reverse Gresham is through human action with states paving the way by taking down roadblocks to using sound money.
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