Key ideas: Published in 1908. A paper read before the american philosophical society. “Among the most certain laws known to economic science is the one that, when two moneys of unequal value are placed in circulation at the same time side by side as currency of the realm, the poorer or cheaper will drive the better or dearer from circulation” (T. Balch)
This law, though fought over most strenuously in this country within recent years, as if its immutable operation had not been thoroughly demonstrated in past ages of humanity, was known in part at least to the Ancients. Of this there is ample proof in the Frogs of Aristophanes. In that play, the foremost comic poet dramatist of Greece places in the mouths of the chorus these lines:
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,
Recognized in every realm for trusty stamp and pure assay,
Are rejected and abandoned for the trash of yesterday;
For vile, adulterate issue, drossy, counterfeit and base,
Which the traffic of the city passes current in their place.
In the above quotation it is distinctly shown that the better coins that had been current were driven out and replaced by pieces of inferior value.
Three men, exercising three different callings, but all three profound students, and two of them ranking among the scholars of the world, in three different, countries, in three distinct periods of time, discovered independently of one another and explained to their respective sovereigns that when into the currency of a country a poorer or cheaper money is injected by the side of a better which is the standard of value, the certain and immutable result will be that the currency of the realm will be debased to the standard of the poorer money.
For as it will then be possible to pay debts in either money, people will naturally pay them in the cheaper currency, selling the better money by weight at the premium that it will command in the standard of the poorer currency.
These three men were Nicole Oresme, Bishop of Lisieux in Normandy, who stated this subtle un- written law of money for Charles the Fifth of France, surnamed the Wise; Nicolaus Copernicus of Thorn in Prussia, the discoverer of the Copernican theory of Astronomy, who expounded this same law of the currency for Sigismund the First of Poland; and Sir Thomas Gresham, a noted English merchant, who explained it to Elizabeth of England.
It is proper then that in honor of these three discoverers of an economic truth that is a precious thing for humanity to know, that this law should be called the Law of Oresme, Copernicus and Gresham.
The chief cause of the unhappy state in which the French people found themselves when Due Charles became king in 1364 was in large measure due to the tampering by their rulers with the weight of the value of the coins of the realm. Many of the French kings had thought to raise revenue by forcing their people to accept a debased coinage….
When Charles the Fifth, upon his father’s death, ascended the throne, he called upon Nicole Oresme, in order that he might reform the coinage of France, to shed light upon the confused currency of the kingdom. And thus it was that Oresme prepared his most important work, already referred to, the first comprehensive treatise upon money, en- titled Tractatus De Origine, Natura, Jure et Mutationibus Monetarum….
Oresme, in stating the various workings of money as the mechanism of exchange, explained in precious words to his sovereign that, whenever the public currency was altered or tampered with in such a way as to bring into circulation two moneys, bearing the same designation but in reality having two different values, the money of lower value inevitably drove the money of higher value out of circulation…
Thus Oresme says:
The rate of exchange and the price of the moneys must be for the kingdom as a law and a firm ordinance which in no way must alter or change.
And further in speaking of the ratio of exchange between gold and silver, Oresme_jpoints out that the value or proportion in which those metals are exchanged in their natural state, is the rate of exchange that must be maintained between gold andT silvexlcurrency…
The mutations of the currency are of great peril to the national welfare
“for the injury which comes by it,” he says, “is not so soon felt nor seen by the people, as it would be by another tax, and nevertheless no such nor similar can be more grievous or greater; and, in addition, gold and silver, by such mutations and changes, shrink and diminish in a kingdom, and in spite of all vigilance and prohibition that may be taken, they go abroad where they are accorded a higher value for, by adventure, men carry more voluntarily their moneys to the places where they know these have a greater value.”
The luminous treatise of Oresme on money opened the eyes of King Charles to the disastrous results to a country whose government attempted to alter the basic value of its currency.
The luminous thoughts expressed in the treatise of Oresme he made his own, and during his reign the weight of the gold currency remained a fixed and unchanged quantity, and that of silver was but very triflingly altered.
The resulting stability in the value of money, the measure of commercial exchange, re-established the regularity of commercial transactions, and furnished an important element to public prosperity. The resources of the realm augmented and with them the power of King Charles grew….
The truths that Oresme taught and upon which Charles the Wise acted, to the profit of his kingdom and therefore of himself, became in great measure forgotten. A century and a half after Oresme ’s death they were rediscovered and restated a second time.
In the year 1526, in a Latin treatise entitled Monete Cudende Ratio, written at the request of Sigismund the First, King of Poland, and his Chancellor, Szydlowiecki, Nicolas Copernicus of Thorn in Prussia, who had elucidated for mankind some of the celestial harmonies, gave to the world an exposition of some of the economic truths.
Independently of the work of Oresme, of which the Prusso-Polish scholar knew nothing, Copernicus made clear for his sovereign that two moneys of unequal value could not be kept in circulation at the same time:
Gold or silver marked with an imprint, constitutes the money which serves to determine the price of things that are bought and sold, according to the laws established by the State or the Prince. Money is therefore in some sort a common measure of estimating values; but this measure must always be fixed and must conform to the established rule. Otherwise, there would be, necessarily, disorder in the State: buyers and sellers would at all times be misled, as if the ell, the bushel or the weights did not maintain constant quan#ty.
The establishment of money has necessity for cause. Though in weighing only gold and silver it would have been possible to practice exchanges, those metals, from the unanimous consent of men, being considered everywhere as precious things, nevertheless there would be numerous inconveni- ences to have to carry always weights along, and, all the world not being apt to recognize at the first glance the purity of gold and silver, it is agreed everywhere to have money marked by government with a stamp designed to show how much each coin contains of gold and silver and to serve as a guaranty to public faith.
Then he explains how the value of metal pieces is changed and depreciated.
The value of money is depreciated by various causes, either by the change of the name, while the same weight of metal contains a mixture of copper which exceeds the measure desired; or because the weight is wanting, although the mixture has been accomplished in the right proportion; or, what is the worst, because the two vices meet together at the same time. The value of money diminishes of itself by reason of a long service that uses the metal and diminishes its quantity and this reason suffices to cause to be placed in circulation a new money.
This necessity is recognized by an infallible sign, when the money weighs notably less than the money intended to be acquired. It is understood that there results a deterioration of the money.
Copernicus, in his treatise on the money of the realm, expounded to his king what measures were necessary in order to restore stability to the much depreciated Prussian money and then maintain the value of the new money on a parity so that it could circulate both in Poland and Prussia.
After pointing out how useless it was to attempt to introduce into circulation by the side of a depreciated currency one of greater value, he then explained how the introduction of a cheaper measure of value by the side of a higher one would drive the former from circulation.
If it does not do to introduce a new and good money, while the old is bad and continues to circulate, a much greater error is committed by introducing alongside of an old currency, a new currency of less value; this latter does not merely depreciate the old, it drives it away, so to speak, by main force.
Then in answer to the argument that a depreciated currency helps the poor, he says:
We see nourish the countries that possess a good currency, while those that only have a depreciated one, fall into decadence and decline.
It is incontestable that the countries that make use of good currency shine in all the arts, have better workmen, and have of everything in abundance. On the contrary, in the States which make use of a degraded money, reigns cowardice, laziness and indolence.
[When two currencies are in circulation at the same time:]
For the first condition to maintain, is that one and the other currency remain under the royal authority, and that they be current and accepted in the whole kingdom by virtue of the prescription of His Majesty ; which would be not of a mediocre importance for the conciliation of public opinion and for reciprocal transactions.
It would be necessary that these two currencies should be of the same degree of fineness, having a similar real value and a similar nominal value, so that, by vigilant care, the State succeeds to maintain perpetually the regulation which it is now question to establish; it does not belong to princes to obtain any profit from the money that they shall coin ; they shall add only so much alloy as may be necessary for the difference between the real value and the nominal value to cover the cost of minting, which will avoid the principal attraction to remelt it.
It would be necessary, at the time of the emission of the new money, to demonetise the old and forbid entirely its use, allowing it to be exchanged at the mints, in the just proposition of the intrinsic value. Otherwise it would be labor lost to wish to re-establish good money; the confusion that would ensue would be perhaps even worse than the actual state of affairs. The old money would crush all the advantages of the new.
According to Copernicus, this will create “confusion that will be perhaps even worse than the actual state of affairs” and the old money (USD) will crush all the advantages of the new (bitcoin).
It is hard to get an accurate picture of what is actually going on in El Salvadore because most of the information we get is one-sided: it comes from the bitcoin maximalists and idealists who are very happy to come to El Salvadore and be able to spend their bitcoin.
More objective reports on bitcoin in El Salvadore, though, seem to confirm what Copernicus warned about. Many people seem to be confused about bitcoin and not that many businesses accept it (see Marc Falzon’s youtube documentary about BTC in El Salvadore, for example.) This might be due to lack of education, since bitcoin was forced on people from the top. But even if everyone magically overnight grasped what bitcoin was all about, as long as there are two currencies in circulation at the same time and one of them is debased, everyone would still face Gresham law. Why would you want to spend bitcoin if you can spend a much weaker and debased currency (USD)?As Oresme and Copernicus explained to their royal Masters that by either debasing or raising V the coins of the realm disaster and confusion would , so also, at the beginning of Queen Eliza- beth’s reign, one of her merchants, Sir Thomas Gresham, pointed out to his royal Mistress this inflexible unwritten law of money.
Thomas Gresham was born in that city probably in 1519, and died there on November 21, 1579. He was educated at Cambridge University, was a Protestant, and all his life took an active part in commercial affairs, often representing in the Low Countries the commercial interests of England. In 1566 and 1567 he built the Royal Exchange in London. He founded also Gresham College, and provided that the science of astronomy should be taught there.
In a letter to Queen Elizabeth, which is headed, “information of Sir Thomas Gresham, Mercer, touching the fall of the exchange, MDLVIII,” and which begins, “To the Quenes most excellant maiestye,” Gresham says:
Ytt may pleasse your majesty to understande, thatt the firste occasion off the fall of the ex- chainge did growe by the Kinges majesty, your latte ffather, in abasinge his quoyne ffrome vi ounces fine too iii ounces fine. Wheruppon the exchainge fell ffrome xxvis. viiid. to xiiis. ivd. which was the occasion thatt all your ffine goold was convayd ought of this your realme.
In 1858 the British economist, Henry Dunning MacLeod, called attention to Gresham’s statement of this unwritten law of coinage, and suggested that it should be known as Gresham’s Law.
At the time he did not know of the more elaborate treatises of Oresme and Copernicus on coinage. But when the works on money of those two master economists were revealed through the effort’s of Roscher and Wolowski in 1862 and 1864 to the world at large, MacLeod, like a true scholar who wishes to give credit to whom honor is due, suggested that this economic law, a law more powerful than the statutes enacted by the strongest Parliamentary bodies, should be known after all three of its discoverers as the Law of Oresme, Copernicus, and Gresham.