¹ Often times have we reflected on a similar abuse, In the choice of men for office, and of coins for common use; For your old and standard pieces, valued, and approved, and tried; Here among the Grecian nations, and in all the world beside; Recognized in every realm for trusty stamp and pure assay, Are rejected and abandon'd for the trash of yesterday; For a vile, adulterate issue, drossy, counterfeit, and base, Which the traffic of the city passes current in their place! And the men that stood for office, noted for acknowledged worth, And for manly deeds of honour, and for honourable birth; Train'd in exercise and art, in sacred dances and in song, All are ousted and supplanted by a base ignoble throng; Paltry stamp and vulgar mettle raise them to command and place, At the sacrifice of outcasts, as the scape-goats of the land.

Aristophanes, , The Acharnians, The Knights, The Birds, The Frogs, trans, by Frere, John Hookham (London, 1907), 319–20.Google Scholar

² Nicholas Copernicus (1473–1543) discussed the process described by Gresham's Law, as did several English writers of the sixteenth century. Raymond de Roover states that in 1551 Humphrey Holt came closest to stating the law in its epigramatic form. In de Roover's words, “This writer [Holt] deplores the fact that the best moneys are being transported abroad because of the ‘greediness’ of the merchants and because all moneys are not of the same standard. The result is that ‘the worst of the said monies does buy and sell the best,’ causing ‘the prices of everything to run upon the worst of our monies to the great decay of all things.’” Gresham on Foreign Exchange (Cambridge, Mass., 1949), 91–92. Other writers, beginning with MacLeod, Henry Dunning (The History of Economics [London, 1896], 38)Google Scholar suggested that Nicolas Oresme (1320?-1382) had “fully explained the matter” of Gresham's law in a passage in the French translation of De Moneta. But, according to Johnson, Charles, this passage was not in Oresme's original version and “is not contained in the two earliest MSS (Paris, Bibl. Nat. MSS fr. 5913 and 23,926) … It has been suggested that longer versions were added by officials of the Flemish mint.” The De Moneta of Nicholas Oresme and English Mint Documents (London, 1956), xii.Google Scholar

³ For the most complete study of Gresham's relation to the law, see: Fetter, Frank Whitson, “Some Neglected Aspects of Gresham's Law,” Quarterly Journal of Economics, XLVI (May, 1932), 480–95.CrossRefGoogle Scholar MacLeod credited Gresham in 1858 with the law's formulation, and within twenty years Gresham's Law had been widely diffused throughout the literature of economics.

⁴ Written expression of the law has taken and takes many similar forms: “A bad and debased currency is the cause of the disappearance of the good money;” “Bad money drives out good money from circulation;” “The worst form of currency in circulation regulates the value of the whole, and drives all others out of circulation” (these are MacLeod's formulations, ibid., 487–89). “An inferior money, so long as it circulates at all, drives a superior money out of the circulation,” Perry, Arthur L., Introduction to Political Economy (New York, 1877), 244.Google Scholar “Bad money drives out good money” but “good money cannot drive out bad money,” Stanley Jevons, W., Money and the Mechanism of Exchange (New York, 1893), 81.Google Scholar Present day writers often replace “bad,” “worst,” or “inferior” with “overvalued” and “good,” “best,” or “superior” with “undervalued.” For example, see: Haines, Walter W., Money, Prices, and Policy (New York, 1961), 40Google Scholar, 55; Kent, Raymond P., Money and Banking (rev. ed., New York, 1951), 33Google Scholar; Klise, Eugene S., Money and Banking (2nd ed., Cincinnati, 1959), 30Google Scholar; Pritchard, Leland J., Money and Banking (2nd ed., Boston, 1964), 36nGoogle Scholar; Clough, Shepard B. and Cole, Charles W., Economic History of Europe (Boston, 1952), 625Google Scholar; Faulkner, Harold U., American Economic History (8th ed., New York, 1960), 156Google Scholar, 157n; Johnson, E. A. J. and Krooss, Herman E., The American Economy (Englewood Cliffs, 1960), 277Google Scholar; Kemmerer, Donald L. and Clyde Jones, C., American Economic History (New York, 1959), 58.Google Scholar

Some economists, however, recognizing the limitations of Gresham's Law in its epigramatic forms, offer more rigorous formulations. For example, Whittlesey, Charles R., Freedman, Arthur M., and Herman, Edward S. (Money and Banking: Analysis and Policy [New York, 1963], 186)Google Scholar state, “Money that has value in a non-monetary use (including use as money in another country) will tend to move, if it is free to do so, to the use (monetary or non-monetary) in which its value is the higher.” Fisher, Irving (Elementary Principles of Economics [New York, 1915], 221–39Google Scholar, 266) analyzed the phenomenon of Gresham's Law accurately and in detail, though he held to the traditional formulation — “Accurately stated, the Law is simply this: The Cheaper dollar (or whatever the monetary unit) tends to drive out the dearer.”

See also: Burstein, M. L., Money (Cambridge, Mass., 1963), 30Google Scholar, 31, 43, 44; Friedman, Milton and Schwartz, Anna Jacobson, A Monetary History of the United States, 1867–1960 (Princeton, 1963), 27nGoogle Scholar; Hayek, F.A., “The Use of ‘Gresham's Law’ as an Illustration in Historical Theory,” History and Theory, II (1960), 101–102Google Scholar; Fetter, op. cit., 492–95.

⁵ Among others, Fetter, 493, Hayek, 101, and Brough, William (The Natural Lotu of Money [New York, 1894], 23)Google Scholar have explicitly set forth this requirement. It is not a sufficient condition for government to declare a fixed mint ratio and then freely mint gold and silver on these constant terms; the nominal values of the coins (the values at which they circulate) must also hold firm for the law to operate.

⁶ For a discussion of the expenses of handling specie, see Kemmerer, Edwin Walter, Modern Currency Reforms (New York, 1916), 350–53.Google Scholar Under certain conditions Gresham's Law can operate when this requisite does not exist. Suppose, for example, that two coins had circulated side by side for some time, even though the monies had unequal intrinsic values and even though domestic legal-tender laws had existed and were enforced. Then the full weight coins suddenly vanished. Why then? Why not before? Seeking an explanation for this apparent delayed operation of Gresham's Law, we discover that the balance of payments on current account turned against the country. With the outflow of specie exceeding the inflow and with domestic merchants using full-weight coins for paying international debts, the nation saw its heavier coins disappear. Domestic merchants sent the full-weight money abroad because in international trade, where legal-tender rules were non-existent and the sole concern of foreign exporters was in the metallic content of the coins, these coins commanded a proportionately larger quantity of goods than the lighter ones. In domestic commerce debased and full-bodied money passed as equals.

Thus, the mystery of why Gresham's Law failed to operate prior to the adverse balance of trade lies in the absence of the fourth requisite. Although the intrinsic values of full-weight and debased coins differed, the silver in the former did not exceed their nominal value by more than the transaction costs of collecting, handling, holding, and transporting them to the bullion market. Had the fourth requisite existed, full-weight coins would have left before the turn of the balance of trade (Hayek, loc. cit. and Fisher, 223 touch on this aspect of Gresham's Law).

⁷ See Fisher, 225–35, for a thorough discussion of this matter. If two different metals are involved — i.e., gold and silver — this eventuality can occur more swiftly. Arbitrage is profitable, let us assume, because the market ratio of gold to silver was less than the mint ratio. As gold moves from coinage to industry, so silver will shift from industry to coinage. The former process increases the supply and lowers the price of gold in industry, the latter process reduces the supply and raises the price of silver in industry, and the market ratio swings toward the mint ratio.

⁸ As an alternative development, merchants might quote prices in terms of ounces of silver or gold and thus accept coins by weight rather than by denomination.

⁹ Breckinridge, S. P., Legal Tender, A Study in English and American Monetary History (Chicago, 1903), 47.Google Scholar

¹⁰ The case of the guineas in seventeenth-century England is one of the best known instances of legal-tender laws in abeyance. Hawtrey, R. G., Currency and Credit (4th ed., London, 1950), 236Google Scholar, 244; Breckinridge, 20, 44–45.

¹¹ Kemp, Arthur, The Legal Qualities of Money (New York, 1956), 144.Google Scholar

¹² Ibid., 134.

¹³ Nussbaum, Arthur, Money in the Law, National and International (Brooklyn, 1950), 50–52Google Scholar; Kemp, 144.

¹⁴ Burstein, 31–32, raises this same question; he answers it with these words; “When other institutional considerations are taken into account, including, perhaps, psychological forces operating against dual price quotations, we might be able to explain the historical data.” Fetter suggests that public opinion might operate to discourage dual prices. Hawtrey, 48–49, also discusses this aspect of Gresham's Law.

¹⁵ Laurence Laughlin, L., The History of Bimetalism in the United States (New York, 1898), 26–27.Google Scholar

¹⁶ Ibid., 26.

¹⁷ For discussions of the Suffolk System see: Bailey, Dudley P. Jr, “The History of Banking in Massachusetts,” Bankers Magazine, XI (August, 1876), 113–21Google Scholar; XI (September, 1876), 207–216; XI (October, 1876), 301–312; Chadbourne, Walter W., “A History of Banking in Maine, 1799–1930,” Maine Bulletin, University of Maine Studies, second series, XXXIX (August, 1936)Google Scholar ; Dewey, Davis R., State Banking Before the Civil War (Washington, 1910), 86Google Scholar; Gras, N. S. B., The Massachusetts First National Bank of Boston, 1784–1934 (Cambridge, Mass., 1937), 101–106Google Scholar; Hammond, Bray, Banks and Politics in America from the Revolution to the Civil War (Princeton, 1957), 549–56Google Scholar; Lake, Wilfred S., “The End of the Suffolk System,” Journal of Economic History, VII (November, 1947), 183–207CrossRefGoogle Scholar; Redlich, Fritz, The Moulding of American Banking: Men and Ideas (New York, 1947), I, 67–81Google Scholar; White, Horace, Money and Banking (5th ed., New York, 1914), 294–95Google Scholar; Whitney, D. R., The Suffolk Bank (Cambridge, Mass., 1878).Google Scholar

¹⁸ Until 1811 notes of the first Bank of the United States circulated in New England.

¹⁹ These discounts varied greatly. In 1809 notes of banks at Lincoln and Kennebec, Me. circulated in Boston at a discount of from 3 to 4 per cent; those of a bank at Hillsborough, N. H. at 30 to 50 per cent; those of a bank at Cheshire, Conn, at 30 to 40 per cent; and those of a bank at Coos, N. H. at 40 to 60 per cent. Martin, Joseph G., A Century of Finance (Boston, 1898), 12Google Scholar; Winthrop, Robert C., Memoirs of the Hn. Nathan Appleton, Ltd. (Boston, 1861), 40Google Scholar; Bailey, XI, 119. After 1812 the discount normally varied from about 1 to 5 per cent at Boston, for by this time competition for these depreciated notes had intensified. The New England Bank began dealing in them extensively in 1814, as did the Suffolk Bank in 1819. Dewey, 82; Hammond, 551–52; Chadbourne, 43; White, 293; Whitney, 7, 8, 19; Redlich, 69, 71; Lake, 184–85; Darling, Arthur B., Political Changes in Massachusetts, 1824–1848 (New Haven, 1925), 13–14.Google Scholar

²⁰ Chadbourne, 41; Hammond, 550; White, 293–94; Gras, 73, 90; Whitney, 11–13; Winthroo; Redlich, 67, 69, 72; W. S. Lake, 183; Hunt's Merchants' Magazine, V (September, 1841), 261; XXIV (May, 1851), 578; XXIV (June, 1851), 707.

Before the War of 1812, members of Boston's financial and industrial community took action to reduce the amount of “foreign currency” in Boston. Winthrop, 41; Redlich, 67–68; Gras, 73–75; Chadbourne, 24; Hammond, 181, 551; Dewey, 80–81; Gouge, William M., The Curse of Paper-Money and Banking (London, 1833), 6–10.Google Scholar

²¹ The majority of historians and economists who have written on this matter have come to this conclusion. “The country bank notes flooded Boston, crowding out of circulation the notes of the Boston banks” (Gras, 101). “They [Boston banks] saw their own notes … supplanted by questionable foreign money” (ibid., 74). “Scarcely a dollar of Boston paper could be seen” (Felt, Joseph B., An Historical Account of Massachusetts Currency [Boston, 1839], 217Google Scholar; Bailey, 120). “Soon the depreciated ‘current money’ [country notes] had almost entirely displaced ‘Boston money’ in Boston” (Lake, 183). “Owing to the monopoly which the country banks still possessed in the note circulation of Boston” (Dewey, 83). “The consequence [of Boston banks' refusal to redeem or accept for deposit foreign notes] was that the bills of country banks obtained the entire circulation even in Boston” (ibid., 79). “… the notes of the country banks were supplanting the notes of Boston banks even in Boston itself” (Foulds, Margaret Hadley, “The Massachusetts Bank, 1784–1865,” Journal of Economic and Business History, II [February, 1930], 261).Google Scholar “The currency [in Boston] consisted almost entirely of the notes of banks outside of Boston” (Whitney, 10).

Some writers have explicitly phrased their explanations of the supposed disappearance of Boston's bills in terms of Gresham's Law. “The better notes [Boston notes] were either hoarded or taken to the banks for redemption in specie. The poorer notes, on the other hand, were kept in circulation” (Whitney Hanks, J. and Stucki, Roland, Money, Banking and National Income [New York, 1956], 98).Google Scholar “The Boston banks found that the cheaper notes of the outside banks tended to drive their own notes out of circulation” (Pritchard, 257). “… following Gresham's law, they [country notes] drove the sounder notes of the Boston banks out of circulation” (Studenski, Paul and Krooss, Herman E., Financial History of the United States [2nd ed., New York, 1963], 89).Google Scholar “Since the notes of country banks circulated in Boston at a discount, they tended, according to Gresham's law, to remain in circulation while the notes of Boston banks were presented to the banks of issue for redemption” (Haines, 84). “… some of the stronger banks in Boston found themselves — through the operation of Gresham's law — at a disadvantage because of the tendency for their notes to be driven out of circulation by the depreciated note of outlying banks” (Whittlesey, Freedman, and Herman, 205). “Once again we see Gresham's law in operation. With two types of money in circulation together, the poorer quality money remains in circulation and the better money disappears from circulation” (Horvitz, Paul M., Monetary Policy and the Financial System [Englewood Cliffs, 1963], 60).Google Scholar “Being inferior to city notes, they [country notes] drove the latter out of circulation” (Hammond, 549). “Under the operation of Gresham's law the worst money that circulated drove out the better” (White, 300). “… Gresham's Law came in play; that is, the worst money drove out the better” (ibid., 294). “Anyone in Boston wishing to hold specie or bank deposits presented the notes of the Boston banks, which on account of this operation of Gresham's Law found it difficult to keep their notes in circulation” (Klise, 155). “This state of affairs [Boston money returning to banks and country money remaining in circulation] was decidedly unprofitable to the Boston banks and constituted onother application of Gresham's law” (Halm, George N., Economics of Money and Banking [rev. ed., Homewood, 1961], 178).Google Scholar “Gresham's law operated, and ‘foreign’ money, because it was overvalued relative to Boston money, became the commonly used medium in the city” (Robertson, Ross M., History of the American Economy [2nd ed., New York, 1964], 165).Google Scholar

²² Unfortunately we do not have extant data that reveal precisely the proportion of city and foreign notes in New England during this early period. To present a rough estimate, however, the author calculated the following numbers

These figures show the possible proportion of notes of Boston banks to the notes of all New England banks for 1811, 1815, 1816, and 1820. As revealed by the data, Boston's bank notes as a proportion of total notes declined slightly from 1811 to 1820. However, this pattern of change may not have held for the money supply of Boston. These data indicate only what might have been the case for New England generally; but since the proportion of all city notes that circulated in Boston probably exceeded the proportion of all country bank notes that likewise formed part of Boston's currency, the above percentages most likely overstate the dominance of foreign money in that city. On the other hand, the author derived the number of country bank notes in circulation in New England by applying the reported ratio of note circulation to bank capital for Massachusetts country banks to the known banking capital of New England. This probably understates the note issues of several of the states, for the Massachusetts banks followed a more conservative policy in note circulation than did their counterparts elsewhere. Consequently, these figures represent only crude estimates (Bankers' Magazine, V, New Series [February, 1856], 623).

²³ More than any other source, a letter written by John A. Lowell and William Lawrence and sent to each bank in Boston in 1824 has led to this viewpoint. The letter is reprinted in Whitney, 11–13. This sentiment persisted well beyond 1825. For an example of a later polemic, see Hunt's Merchants' Magazine, XXIV (March, 1851), 316–23; XXIV (April, 1851), 439–47.

²⁴ For example, before 1812 most bank charters awarded in Massachusetts permitted banks to issue notes in amounts equal to twice their paid-in capital. After 1812 this amount fell to 50 per cent beyond paid-in capital. The Massachusetts legislature in 1829 reduced this to 25 per cent beyond paid-in capital; furthermore, the total amount of debt, exclusive of bills, was not to exceed twice the capital paid-in. Gras, 109; Bailey, XI, 212–13.

²⁵ Whitney, 11.

²⁶ Whitney, 11–13; Gras, 90; Chadboume, 41–42; Hammond, 550; Lake, 183. For discussions of the lending activities of several prominent banks in Boston during these years prior to 1825, see Whitney, ; Gras, ; and Stetson, Amos W., An Historical Sketch of the State Bank, 1811–1865 and the State National Bank, 1865–1891 (Boston, 1891).Google Scholar

Since country banks specialized in lending relatively small amounts to artisans and shopkeepers, among other persons, in Boston and since Boston's banks generally did business with industrialists and merchants who operated on relatively large scales, the notes of country banks would necessarily be more in evidence in the channels of retail trade and could have misled observers into thinking that banks of Boston were suffering gravely.

²⁷ When making their required annual reports, bankers lumped together demand and time deposits. For a discussion of the evolution of the distinction between time and demand deposits, see Redlich, 13–16, 50–54.

²⁸ Miller, Hany E., Banking Theories in the United States before 1860 (Cambridge, Mass., 1927), 117CrossRefGoogle Scholar, 156; Redlich, 12, 16, 50, 74; Hammond, 81, 549; Gras, 49; Appleton, Nathan, Remarks on Currency and Banking (3rd ed., Boston, 1857), 7Google Scholar; Smith, Walter B. and Cole, Arthur H., Fluctuations in American Business, 1790–1860 (Cambridge, Mass., 1935), 5.Google Scholar

²⁹ Redlich, 51; Hammond, 81, 549–50; Smith and Cole, 5; Miller, 109, 117; Gras, 12, 36, 116; Appleton, 7; Chadbourne, 14.

³⁰ Gras, 49.

³¹ Usher, Abbott P., The Early History of Deposit Banking in Mediterranean Europe (Cambridge, Mass., 1943), 286–87Google Scholar; Clough and Cole, 493.

³² Gras, 341.

³³ Woods v. Schroeder, 4 Har. & J. 276 (1817); Cruger v. Armstrong, 3 Johns. Cas. 5 (1800); Conroy v. Warren, 3 Johns. Cas. 259 (1802); Merchants' Bank v. Spicer, 6 Wend. 445 (1828); Murray v. Judah, 6 Cow. 484 (1825); Clenn v. Noble, 1 Blaclf. 104 (1820); Humphries v. Bicknell, 2 Litt. 299 (1822); Shrieve v. Duckham, 1 Litt. 194 (1822); Eichelberger v. Finley, 7 Har. & J. 381 (1826); Cashing v. Gore, 15 Mass. 71 (1818); Franklin v. Wanderpool, 1 Hall, 78 (1828); Ellis v. Wheeler, 3 Pick. 18 (1825); Ball v. Allen, 15 Mass. 433 (1819); Mauran v. Lamb, 7 Cow. 174 (1827); People v. Hoioell, 4 John 296 (1809); Levy v. Peters, 9 S & R. 125 (1822); Dennie v. Hart, 2 Pick. 206 (1824); Patton v. Ash, 7 Serg. and R. 116 (1821); Elting v. Shook, 2 Hall 459 (1829).

³⁴ Compiled from Hunt's Merchants' Magazine, II (Feb., 1840), 137–138. The reserve ratios for banks in Boston varied more widely over time than those for Massachusetts' country banks or those for Maine's banks. The ratios of the latter institutions remained fairly stable, for these banks were relatively isolated from the unsettling influences of wars and international specie flows, among other things. For example, reserves in Boston ascended suddenly in 1812 and remained relatively high until 1816; chiefly responsible for this were the British blockade of our ports, the consequent dependence upon New England for manufactured items by other regions in the United States, and the insistence upon payment in specie by merchants and industrialists in Boston. The sharp rise in specie exports in 1822 and 1825 probably influenced specie holdings of Boston's banks and thus help to explain the drop in reserves during these years. One can explain the apparent downward trend in reserves in banks of Boston and Massachusetts by noting the rapid rise in the number of banks chartered. There were 3 banks in Boston in 1810 and 17 in 1830; the number of country banks in Massachusetts rose from 12 in 1810 to 46 in 1830. Apparently the number of banks in existence increased more rapidly than specie; thus the specie per bank declined. Hunt's Merchants' Magazine, loc. cit.; North, Douglass C., The Economic Growth of the United States, 1790–1860 (Englewood Cliffs, 1961), 219–20Google Scholar; Winthrop, 41–42; Appleton, 23; Smith and Cole, 5, 19, 20, 28, 57; Bailey, XI, 207; Stetson, 23; Gouge, 113, 114.

³⁵ Hunt's Merchants' Magazine, III (November, 1840), 458; Bankers' Magazine, V (February, 1856), 623.

³⁶ Hunt's Merchants' Magazine, II (February, 1840), 137; III (November, 1840), 458; Bankers' Magazine, op. cit.

³⁷ Redlich, 67, 69, 72; Lake, 183; Whitney, 11–13; Chadboume, 41; Hammond, 550; Hunt's Merchants' Magazine, V (September, 1841), 261; XXIV (May, 1851), 578; XXIV (June, 1851), 707; Winthrop; Gras, 73, 90; White, 293–94.

³⁸ The end sought by the founders of the Suffolk System was clearly a reduction in competition from country banks. This purely selfish objective seems to have been forgotten by many who write as if the creators of the System had been motivated primarily by a desire to correct a defect in the banking system or to make the banking system more sound. See Halm, 177; Haines, 84; Hanks and Stucki, 98; Kemmerer and Jones, 208; Faulkner, 161; Chadbourne, 39. In a letter to all banks in Boston in 1824, two of Suffolk's directors openly revealed the motivation for creating the system: “Loans to an immense amount are made by their [country banks] agents here at reduced rates of interest … and in this manner deprive us of much valuable business …. The committee have no doubt that, if these measures [adoption of the Suffolk System] are adapted and vigorously pursued, the banks in this place [Boston] will obtain a circulation of three million dollars, and a proportionate increase in their discounts.” Whitney, 12.

³⁹ Some writers have noted this lack of response of Boston's notes, but have not pointed out that it refutes the notion that Gresham's Law was operating. Lake, 187–88; Dewey, 92.

⁴⁰ For example, see; Chadbourne, 14, 15, 16, 29, 30, 32; Gras, 68; Smith and Cole, 20, 27; Stetson, 43.

⁴¹ Appleton, 10.

⁴² The author wishes to thank W. H. Allen, J. F. Barren, H. L. Miller, and W. C. Scoville for their useful comments on, and criticism of, an earlier draft of this essay.