Is Gresham’s Law A Silly Mistake Or An Example Of Deliberate Juggling Of Facts & Concepts? (Part I)

May 21, 2015

Nicolaus Copernicus came to similar conclusions even before Gresham in 1526…as he presented them in his paper “Monetae Cudendae ratio” (aka “Treatise on money”). As a result, nowadays we know the following formulation of Gresham`s/Copernicus law:

Gresham's law

“Bad money drives out good money”.

We teach the students of the world`s leading universities (majoring in economy) this particular interpretation of Gresham`s/Copernicus law.  Unfortunately, it surely is essentially wrong. It isn`t a difficult task at all to understand why this interpretation is well wide of the mark. However, it`s more challenging to try to understand it as much possible. We will demonstrate the logical disproof of Gresham`s/Copernicus Law step by step as rationally as possible. In order to do it, we need to refresh our memory of some basic philosophy and money circulation postulates.    

So, let’s start the logical disproof of Gresham`s/Copernicus Law, compressing key ideas and theses in what you might call a Short Message Service (SMS) style:

1. Let us depict the chain of creation, setting priorities in chronological order. It looks like this:

Energy begets life -> Life gives birth to reason -> Reason generates goods -> Goods entail commodity exchange -> Commodity exchange generates money -> Money begets currencies

This chain is absolutely clear…so let`s consider it as an axiom and remember it well as we will definitely need this postulate later.

2. Let us define the “Goods”: The goods represent the energy, embodied in various commodity forms using reason and labor. You can find more detailed information here.

3. Let`s take a look at the classical definition of “Money”: Money is primarily a commodity. Moreover, it`s a universal commodity. All users of commodity exchange agree to accept it as a payment for their goods.

4. Now let us give the “Currency” an axiomatic definition: the world`s currencies represent money, guaranteed by some emitters of these currencies.

5. Let us remember the expression, used by JP Morgan during his speech in the United States Congress on the December 19, 1912:  “Gold is money and nothing else. Everything else is credit”.

6. Now let us add and define “The Value”, another essential term:

The value of an object is defined by the price the buyer is ready to pay for it -- and the payment the seller is ready to accept.

7. We should also pay attention to the fact that the concept of money presented in item 3, and the concept of currency, presented in item 4, cannot be equated. These phenomena have different economic and juridical nature. Money is primarily a commodity, while currencies represent the money, promised or guaranteed by somebody. This is the main difference between money and currencies: the relative value of money is determined by the market exclusively, during the commodity-money exchange, while the relative value of currencies is determined by the emitters` decrees.

We should also remember the position of money and currencies in the chain, representing their priority. Energy has the highest possible priority in the chain of creation due to the fact that the transformations of energy beget all the subordinate phenomena: life, reason, goods (commodities) as energy forms, money as a universal commodity and currencies as promises of money. Money and currencies are subordinated to reason and have the lowest priority on the chain.  Consequently, it is absolutely natural, as both money and currencies are the products of reason…and without reason they can`t be generated even by an unlimited amount of energy.

It means that wrong terms are absolutely unacceptable in economy, just like in any other science, so it is essential to develop a reasonable interpretation of money and currencies. The concepts of money and currencies are substantially different, they also have different priority in the chain of creation.

If you equate money and currencies in economic laws, it is the same as equating your parents and children in legal documents.

The use of wrong terminology is unacceptable in all kinds of laws. In economic laws it is just as dangerous and destructive as in the laws of nuclear physics.

That`s it!  The abovementioned information is quite enough to draw a preliminary conclusion, that Gresham`s/Copernicus Law is incorrect, at least its literal interpretation that is used very widely and learnt by students. It`s obvious that both Gresham and Copernicus were talking about currencies, not about money. In other words, the law contains a silly mistake or a deliberate juggling of facts and concepts. In either case the common formulation of Gresham`s/Copernicus Law is anti-scientific and utopian…this thesis is confirmed by both elementary logic and the monetary history of mankind.  

Good money has always driven out and replaced bad money. Money (the universal commodity) was represented by various goods, depending on the historical epoch: small rocks with apertures, sea shells, sheep, sacks of grain etc. However, all these kinds of bad money were eventually replaced with good money. Consequently, mankind gradually recognized gold as the best kind of money. Due to its properties, gold insensibly drove out all the bad money that had been used earlier.

This generally known historical fact contradicts the common formulation of Gresham`s/Copernicus Law and refutes it completely.

If the law contained the term “currencies” and its definition instead of the term “money”, it would`ve been absolutely correct…and would have reflected the truth. However, the interpretation of Gresham`s/Copernicus Law, containing the term “money”, is an anti-scientific and unhistorical algorism, that is out of all relation both to economy and historical reality.

Robert Mandell, who received the Nobel Memorial Prize in Economics in 1999, later made the same terminological mistake, when he made an amendment to Gresham`s/Copernicus Law. Subsequently the law sounded like this: “Bad money drives out good if they exchange for the same price”.

Take notice that Mandell used the economic term “money”, instead of the more suitable term “currency” once again.

When a housewife goes to the shop and says:  “I left my money at home”, it sounds natural and correct. Indeed,  it would`ve been strange if she had said in such a situation:  “I left the national currency at home”.

However, when we`re dealing with famous economists and economic laws instead of housewives, juggling of basic economics terms is intolerable. For example, the traffic code contains a list of malfunctions that make the car operation illegal. It also contains another list of malfunctions that make the running illegal, not just the car operation. That is, if the backup alarm doesn`t work, you can`t operate this car or use it for transportation. On the other hand, you have to right to drive this car to the parking area during the daylight for further repairs.

However, if the steering or the breaking system malfunction, you can`t use the car at all – it is prohibited by the law. Such a car can only be delivered to the repair facility using a properly functioning vehicle, designed for transportation of defective cars. Therefore, the traffic code contains two different terms – the car “operation” and “running”. However if you switch these terms in the traffic code, the death-rate will increase many times.

It is my firm belief, that the inadmissibility of juggling with terms in laws is a widely known axiom and needs no additional proof.

It begs the question: Is it possible, that a Nobel-Prize winning economist failed to realize the differences between basic economic terms that have different priority in the chain of creation? I don`t think so. Gresham`s/Copernicus Law and its transformations most likely have something to do with somebody`s malicious intent…and Mandell is well aware of it. But we`ll discuss it a bit later.

Of course, after reading the abovementioned information, the supporters of Gresham`s/Copernicus law will catch at a straw, just like drowning men, and try to object. A straw will be represented by the term «commodity money», which was in fact used by Gresham. Indeed, in the Google search engine the term «commodity money» is often followed by the phrase «Gresham's Law». However, such objections will only turn into an attempt of covering the absurdity with even more ridiculous nonsense. Why?

Because there is no «commodity money» in the monetary history of mankind, it has never existed and can`t exist even theoretically.

Money is primarily a commodity. A commodity can`t be “commoditou”, just like there can`t be “bee” bees or “fishy” fish. All these phrases are equally absurd tautologies. Only currencies can be “marketable”, no matter what material they`re made of: bamboo, copper or gold.

Every time you see a phrase “commodity money”, please be aware:  This is an attempt to control your thinking.  The success of this attempt only depends on you and your reason.

The postulate that a bimetallic monetary system is fated to failure, is false in the very same way. Only bimetallic currency system, when the value of silver and gold currencies is determined by decrees, is completely hopeless. However, under a bimetallic monetary system the relative value of silver and gold money is determined by the market, according to the weight of metal. Therefore, under such a system there is no dis-balance when the price of gold or silver or changes naturally, as under the bimetallic system the market price of gold and silver relative to each other has no collection with the value of the national currency, that determines the value of these monetary metals according to somebody`s decree.

Let`s analyze this aspect more thoroughly. What is a round-shaped piece of gold, containing a currency denomination, first of all? If a gold coin is a valid instrument of payment, is it primarily a piece of gold with a specific weight? Or is it primarily a currency, whose value is determined by somebody`s decree?

There is no doubt that it is primarily a currency. Regardless of the weight of gold the coin contains, its value is determined by the decree, issued by the emitter state. This particular currency value, impressed on the coin itself, is taken into account during tax payments. In other words, the prevalence of the appointed currency value over the gold coin`s monetary value is imputed by the law. Of course, a gold coin still preserves its monetary nature, determined by the weight of gold. The monetary value of gold can be in close agreement with the currency value of this particular gold coin, determined by a decree, however it is not always so. However, gold coins that can be used as instruments of payment (the ones mentioned by Gresham) are primarily a currency, not money, as the value of these coins is determined by the state decree and the currency denomination, impressed on the coins themselves in the first place.

By the way, all gold currencies ceased to exist as currencies, not as money, due to the de-synchronization of their monetary and currency value. That is, the flight from gold and silver currencies (commodity currencies) was primarily caused by the gap between their appointed currency value and their real monetary value. This gap is called seigniorage.

Let`s consider several examples in order to develop a better understanding, why the monetary component of a gold coin is inevitably forced out by its currency component:

Example 1: You have been presented a very beautiful gold ware that is extremely difficult to manufacture. What do you consider it to be in the first place – money, whose value is determined by the weight of gold or a beautiful piece of jewelry?

 Example 2: Imagine, that you have a 1 oz. gold plate with a with a Swiss bank`s promissory note impressed on it. Let us suppose that although this promissory note is engraved on the metal, it is still valid. Its value is 1 million of Swiss Francs. What would you consider this plate to be in the first place – money, whose value is equal to 1 oz. of gold, or a good in law Swiss bank`s promissory note, whose value is 1 million of Swiss Francs?

As a matter of fact, the exact sum of money makes no difference. Even if the promissory note is labeled as 1 cent. By its economic and legal nature, it will rather be a bank`s bill of exchange than money, whose value is determined by the weight of gold. The gold in this plate will still remain money, however it will primarily function as a medium of a promissory note with a predetermined value. The situation with gold coins is quite the same: gold is a medium of a specific currency value, determined by somebody`s decree, in the first place, not money.

In both of the abovementioned examples you are free to decide, what a specific item primarily is just for you: money, a piece of jewelry or a promissory note. However, when dealing with gold currencies you don`t have such an option, because according to the current legislation, all market participants are strictly obliged to recognize a gold currency as a currency in the first place, not money, whose value is equal to the weight of gold.

Now let`s get back to J.P. Morgan`s expression: “Gold is money and nothing else. Everything else is credit”. Let us point out: Morgan didn`t say, that gold coins or gold currencies can be considered as money. He said, that only “gold” in itself is money.

In other words, only monetary gold can be considered money (a universal commodity) and its value can be determined in accordance with its weight and the market value of gold per unit weight.

The conclusion is as follows: every piece of gold with a currency denomination engraved on it turns into a currency into the first place…and it can only be considered as money secondarily.

Let us suppose, that with great reserve we can agree with Gresham about gold coins, because gold coins are primarily currencies and their monetary component and monetary value, determined by the weight of gold, are secondary.

However Gresham mentioned copper coins as “bad money”, not as “bad currencies” as well. How can you agree with Gresham about copper coins if he calls them money instead of currency? After all, copper isn`t a monetary metal and Gresham isn`t a housewife, is he?


Courtesy of


It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.
Top 5 Best Gold IRA Companies

Gold Eagle twitter                Like Gold Eagle on Facebook