Many persons fear an outflow of gold from the operation of what is known
as "Gresham's law," namely, that "bad money will expel good." Sir Thomas
Gresham, a financier of Elizabeth's time, stated that if a number of
the gold or silver coins of any given denomination were deprived of part
of their pure metal, and so made cheaper than the remainder, a
successful circulation of the coins thus deprived would result in the
melting up or exportation of the coins of standard weight. Writing of
this, Mr. Jevons ("Money and the Mechanism of Exchange," American
edition, page 84) says:
Gresham's remarks concerning the inability of good money to drive
out bad only referred to moneys of one kind of metal. * * * The
people, as a general rule, do not reject the better, but pass from
hand to hand indifferently the heavy and the light coins, because
their only use for the coin is as a medium of exchange. It is
those who are going to melt, export, hoard, or dissolve the coins
of the realm, or convert them into jewelry and gold leaf, who
carefully select for their purposes the new heavy coins--
and avoid the light or abraded coins.
There is, however, a theorem which applies to all money, but which was
recognized long before Gresham's time--although it has been erroneously
called an "extension" of the law or theorem of Gresham.
That theorem is this: If, in any country, there are two forms of money,
each of which is a full legal tender, and one of which can be obtained
with less sacrifice than the other, the one requiring the least
sacrifice will be the cheaper, and if the unit of that cheaper money
will perform in every respect the same function in the payment of debts
and settlement of all obligations that can be performed by the dearer
money, then, for obvious reasons, the cheaper money will come into
universal use, and the dearer money will disappear. But it does not
follow that the cheaper money is bad money nor the dearer money good
money.
The best money is always the money of the contract, that is to say a
money whose dollar, whatever it may be made of, is equal in value to the
dollar of the contract. If the money of the contract is the cheapest
money, then that is the best money, that is the honest money, and that
is the only tolerable money.
If that be the sort of "cheap" money that drives out the dear money,
then manifestly the dear money is bad money.
A distinguished official of the Government, who was before a committee
of this body the other day, insisted that the proposed Treasury notes
should be redeemed in the "best money." I asked him what was the "best
money." "Why," he said, "the money that is worth the most." Now, it
strikes me, Mr. President, that if you have borrowed a dollar, and,
through a badly regulated money-system, are made to pay a dollar worth
25 per cent. more than the dollar you borrowed, you are not paying the
best money, but the worst money; not an honest dollar, but a swindling
and dishonest dollar.