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Gresham’s Law is seen as one of the many enduring laws of the discipline of economics. Much like the laws of Comparative Advantage, Supply and Demand, and Diminishing Returns. However, is it possible that Gresham’s Law is based upon a misconception? After all, there are several examples of undervalued and overvalued currency simultaneously circulating at the same nominal value. Do these exceptions invalidate Gresham’s Law? Depending on who you ask, yes. However, proponents claim that these outlying examples apply to conditions under which Gresham’s Law is not applicable. Both sides generating formidable arguments.

It should be mentioned that Natural Laws, Laws of Science, etc. tend to be perceived as being fixed. Immutable. Is this an accurate interpretation of such a variety of Laws (economic laws included)? By definition, a scientific law is an enduring observation that has been universally replicated. Contrary to the popular opinion it is not definitive. Meaning that is still subject to some variation and possible exceptions. Whenever a Profession Skateboard performs a particularly daring stunt, we refer to it as “gravity-defying”.  Such a statement does not so much invalidate the Law of Gravity but demonstrates a mild momentary exception. Within seconds of completing the mauver, the skateboarder is pulled back down by the gravitation force of the Earth.


It is possible that I am mischaracterizing the exceptions of the Laws of Gravity.  I am far from well versed in physics. I have never taken much interest in it as a field of study.  Even the moon to some extent has gravitational force it is just to a lesser extent than Earth. Making the law exist in a continuum of applicability versus an outright exception. I would surmise the same is applicable to the laws of the social sciences as well.


There was a 1986 study published by the Minnesota  Federal Reserve that put into question the veracity of Gresham’s Law. The controversial study was authored by  Christopher A. Sims and Arthur J. Rolnick. Two particularly salient exceptions cited in the article were pertaining to Silver Dollars and Greenbacks in the United States.  In the years between 1792 and 1853, the U.S. Silver Dollar and the Spanish milled Dollar simultaneously circulated at the same face value. The Spanish milled Dollar contained 373.5 grains of pure silver in contrast to the U.S. Silver Dollar only contained 371.25. Making the foreign silver coin heavier and possessing a higher intrinsic value. Despite the fact that Gresham’s law is considered axiomatically true the Spanish Silver Dollar was not driven out of circulation (P.4) [1].


The second notable exception to Gresham’s Law referenced in the study was the exchange of Greenbacks. Greenbacks were one of the earliest examples of purely fiat currency in the United States. Which the paper money that was not backed by specie was produced to help fund the Civil War [2]. Per the contingencies of Gresham’s Law, we would assume that the Greenbacks drove currencies backed by gold and silver out of circulation. Some sources did claim that this was the case.  Not so.


Did greenbacks drive out specie? Some textbooks claim they did (Prager 1982, p. 32, for example), but Moses, writing in 1892, makes it clear that in the West, despite the presence of greenbacks, gold remained the unit of account and a medium of exchange. He says that a contributor to the San Francisco Daily Herald wrote that greenbacks were also current there, but at a discount (Moses 1892, p. 18): “A writer in this journal, February 16,1863, found very little difficulty arising from the use of legal tender notes; for they had a market value, and most people were ready to receive them at that value.” In the East, it appeared that the money system was reversed. There, according to Moses (1892, p. 15), greenbacks were accepted as the unit of account and specie circulated at a premium. (Sims &Rolnick, 1986, p.5) [3].


Both researchers provided expanded upon how such exceptions could occur. They repudiate the claim that they did not cover any true exceptions. As in both instances, the rate of exchange in both examples was not fixed. They rebut this claim by stating that holding a fixed exchange rate is inoperable.  Historically they aren’t any records of mints operating in such a manner. Also, if a mint has a large stock of commodity money offered at a “bargain” for the establishment will either run out of money and either go out of business or change course in coinage policy (page6-7) [4]. Sims and Rolnick also disputed the claim that mints did not fix exchange rates but legal tender laws did. Such laws do not prevent prices from being calculated in “bad” money. Meaning vendors would make a larger profit at the expense of public ignorance of the difference in intrinsic value (Page 7) [5]. Based upon these observations they concluded that the assumed conditions of Gresham’s Law were incorrect. Bad money drives out good money when the transaction costs are significantly high to use good money (Page 9) [6].


Naturally, these arguments were not meet without resistance.  Economist George Selgin provides some strong counter-arguments to the 1986 study. Selgin dispels the potential of the exchange rate claim causing naive customers to be duped by vendors. Acceptance of both monies at face value is based upon legal penalties for discriminating between them rather than a personal appraisal. Per Selgin Gresham’s Law only applies if customers and vendors are “legally compelled” to accept overvalued and undervalued money of the same face value. Pertaining to the exception of the Greenback-era in California local authorities refused to enforce federal legal tender laws [7].




6 thoughts on “Gresham’s Law- A Fallacy?

    1. Thank you I appreciate it. It’s possible confused a few details. Hopefully the majority of what wrote was accurate.

      That is the same fear that has kept from writing about Negative Interest Rates, I make sure to do some extensive research for that one.

      Also, I will be reading your revised paper soon.

      Thank you.

      Liked by 1 person

  1. Ok, as promised, here are some comments: I learned a lot from this post, especially about the history of “greenbacks” (which is fascinating!), and as a good Coasian, I like Sims & Rolnick’s “transaction cost” approach to Gresham’s Law, but I am especially curious about whether Gresham’s Law would apply in a world with many competing “crypto coins” or “cybercurrencies”. What do you think?

    Liked by 1 person

    1. That is a difficult question to grapple with. It depends upon which version of Gresham’s Law is actually true. If we accept the simplified version of the law then it absolutely applies . However, this is also contingent upon us agreeing that Cryptocurrency is actually money.

      That is a controversial question in of itself. Some people say it is. Some people believe it isn’t. Just recently India legalized cryptocurrency transactions. Meaning in the eyes of the Indian government this time last year bitcoin wasn’t money. I am not necessarily up on which countries see crypto as a valid medium exchange or not. I certainly don’t doubt legal barriers play a role in whether cryptocurrencies are considered money. Also, even where cryptocurrencies have not been outlawed there are still a number of vendors that will not accept it as a form of payment.

      It is similar to gold and silver in this regard. Here in Arizona, we can legally transact in Gold per state law. However, good luck making a purchase at Walmart with a gold bar. Similar situation with digit currencies. There isn’t a law stating that I can’t purchase goods with Ethereum. If I try to use it at major retail chains, odds are I will be out of luck.

      In the near future, I am going to address this question from the standpoint of Ludwig Von Mises’ Regression Theorem. Considering the Austrian School’s affinity for privatizing currency there are some interesting arguments to whether crypto is actually money.

      Another consideration is whether Thiers’ Law applies to cryptocurrencies. The citizens of nations that are greatly impacted by inflation are very much devotees to the crypto movement. What used to happen in with displacing highly inflated currency with the U.S. Dollar is now happening with crypto.

      Liked by 1 person

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