Gresham's Law: What a Merchant from the 1500's Can Teach Us About Bitcoin & Money

Sir Thomas Gresham, esteemed Merchant & Financier (left) / Laser-eyed Sir Thomas Gresham (right)

The older the question, the older the answer... 

Money is an essential part of human history that has taken many forms including large stones, seashells, precious metals, and most recently, government-backed fiat paper notes. The complexity of humanity drives our differing individual wants and needs, leading us to exchange goods and services with each other for some form of money. Thomas Gresham, an English merchant in the 16th century noted something interesting in a letter penned to Queen Elizabeth I. Her father, Henry VIII, had replaced 40% of the Silver in English shillings with base metals to increase the government's income without having to raise taxes. Merchants and ordinary subjects took notice of this happening, and saved the good shillings (pure silver) and circulated(transacted) the bad ones. The circulation of the English Shilling became flooded with the new coins with lesser intrinsic value, while the silver shillings were held (HODLed). 

This led to what is now referred to as Gresham's Law, which in simple states that: "Bad money will drive good money out of circulation". The logic is mostly self-explanatory in that you would save the good money, and spend the bad money. Voltaire once said "History never repeats itself. Man always does" and when we look at what happened in 1965 in the United States, he seems to be right. In 1965 the United States half-dollar coins contained 40% silver, but in previous years these same coins were roughly 90% silver. Can you guess what happened next? The 90% silver coins quickly disappeared from circulation as hoarders and collectors loaded up. In the coming years, roughly around 1971, the  40% silver half-dollar coins began to exceed their face value, prompting the government to stop minting any half-dollar coins with silver included in them.

Gresham's Law was mainly constrained by the value of both forms of money being accepted at an equal value under legal tender law. When ignoring the limitations of the influence of legal tender legislation, we can examine the inverse of Gresham's Law which is Thiers' Law. Thiers' Law argues that bad money would drive good money to a premium rather than driving it out of circulation. We have seen that with several experiences of "dollarization" or "currency substitution" in countries with weak economies and currencies. We have seen this several times throughout history with varying forms of "good money" taking pole position; whether it be the Weimar Republic, Zimbabwe, or most recently Venezuela in their hyper-inflationary periods. 

The Royal Exchange(right) founded by Thomas Gresham in 1571, London

The same song can only be sung so many times until people everywhere know the tune... 

The conversation surrounding the ethics of central banking has straddled across several decades. The Austrian School of economics has arguably contributed the most thoughtful insight to the risk of excessive growth in bank credit due to artificially low-interest rates set by a central bank. I won't go into detail on their ideological theory, but if interested you should reference the work of Menger, Mises, Hayek, Rothbard, and Hoppe. In short, central banking looks to maintain economic stability and longevity, but can overcomplicate an already complex and intertwined economic system. The dance between monetary and fiscal policy makers has been a difficult one, especially in countries like Argentina and Nigeria. 

Nigeria, the largest economy in Africa, and Argentina, the second largest economy in South America, both share a common struggle with inflation. Despite both countries hosting their own soverign currency of the Naira and Argentine Peso, both countries have many vendors that accept the US dollar as a hedge against inflation and currency devaluation. While the dollar may help them as individuals, many citizens recognize that it harms their economy if they dollar denominate. With both countries showing double digit inflation, Bitcoin has become a viable option to protect purchasing power and avoid currency devaluation. 

Both countries have restricted the amount of dollars citizens could buy and hold in an attempt to stop capital outflows. These restrictions have made Bitcoin a very attractive opportunity to not only protect, but grow their wealth. CoinDesk reported that there was roughly a 24% premium on the price of Bitcoin being purchased in Nigeria using Naira. At the time of writing this, there is currently a 22% premium on Paxful. Similarly, on Bitso, a Latin American crypto exchange, the Argentine Peso/BTC market is trading at a 65% premium. This proves both Gresham's Law and Theirs' Law to be true in this uncertain time of inflation that bad money (Naira/Peso) is driving good money (Bitcoin) to a premium. 

Inflation Rate Data of Nigerian & Argentina
Exchange rate of Argentine Peso to US Dollar

Exchange rate of Nigerian Naira to US Dollar

So, where does this all lead to?

To be quite honest, no one knows. Money and value is largely a societal game of trust. Right now, the world trusts the government backed US dollar, however, that doesn't mean the world is fond of it. It is not a far-fetched idea to think we will at some point in human history witness the denationalization of money. In fact, Fridrich Hayek even penned a book about exactly that in 1976, appropriately titled: "The Denationalization of Money". One thing we are assured of is the evolution of money throughout history, taking many different forms to best suit the perceived value at its respective time in history. Bitcoin is over a decade old, has proved resilient in its harsh environment, and is now seeing a great deal of interest given the uncertainty of a dollar denominated future. It could fail, it could succeed, only time will tell the story of the world's first decentralized currency. Whatever may happen, we are lucky to witness the imergence of a technology that has the potential to change the world for the better.


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