Gresham’s law is a very interesting principle that states quite simply “bad money drives out good”. A lot of people think that money, as we know it, this paper stuff is somehow tied to something that has an intrinsic value. Gold for example. And that paper money is really just a contractual representation of the gold that exists somewhere. Absolutely not true. In fact the USA completely abandoned the “Gold Standard” as it is called back in 1971. So the inherent value of money is whatever you think it is valued at. It’s not quite that simple but there are many times throughout history when citizens lost confidence in money to the point of literally needing a wheelbarrow of cash to buy a loaf of bread. Germany hyperinflation was certainly bad at 29,500% but the top winner historically was Hungary with 41.900,000,000,000,000,000% inflation rate back in 1946.
Sir Thomas Gresham, who Gresham’s law is named after, was an English financier back in the mid 1500’s. He made the observation that good money will always drive out from bad. So humans have known of this phenomenon for hundreds of years, but we are still making these same mistakes. But we can hopefully learn from history to help us today.
So what is “good money” as referenced in this instance. Good money is money that shows little to no difference between its commodity value, which is the value of the stuff the money is actually made from, and it’s nominal value, which is what the currency suggests it is worth by it’s face value. So in the case of our paper money what is the actual value of this piece of paper? Fractions of fractions of a penny. It is only because we all agree and trust the government that this piece of paper is worth anything.
But it wasn’t always that way. Back in 1792 the US mint was established and minted coins that were made of silver. That continued with various concentrations of silver up until 1965 when all silver content was removed from nickels and dimes through passage of the coinage act.
Now an interesting phenomenon happened shortly afterwards in that there was an increasing number of people who realized the actual value of the silver in these coins (the commodity value) was worth more than it’s nominal value. So people started to hoard the coins that were known to have silver content. Pre 1965. Today you will almost never see these old coins in circulation any more. And if you do hold on to them because they are worth many times more than their actual face value. In fact many people today buy bags of the old silver coinage which is called “junk silver” as an investment. Here you can see $1000 face value in junk silver coins will cost you $11,000. If you had held on to $1,000 in dimes, you could sell those today for over $11,000 dollars. And silver prices right now are relatively low, so that price is likely to rise. So if you have any silver coins you should hang on to them just in case. People never think these things will happen but they have happened many times throughout history and they will happen again.
So the question is if our own monetary value continues to erode will we see people starting to hoard pennies for the copper value? Already happening. Canada actually stopped making pennies years ago likely for that very reason. And coin content has changed over time to keep ahead of Gresham’s law. For example pennies in the US were made of 95% copper until 1982, 1983 pennies were 97% zinc and plated with a thin copper coating. This made sense because as the value of the copper went up, anyone could simply buy the pennies and hoard them or even melt them and make a profit because Gresham’s law always drives the good money underground. The USA actually loses millions making the penny as it costs almost two cents to produce, and that number is likely to increase as inflation continues. In fact even now you can purchase a machine from Ryedale enterprises that will automatically sort your pre 1982 copper pennies from the zinc ones in bulk. So you could technically go to the bank get $100.00 worth of pennies, double your money on the copper pennies as currently the copper value is about 2 cents. Roll and return the non coppers and get another $100.00 and repeat. Obviously copper prices are too low now and the dollar is still strong enough that this would be too much work for too little money. But that situation could change. A great website to check the actual commodity value of the coins in your pocket is coinflation.com. They’ll give you the current metal value of all coins.
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