Historical evidence of anti-Gresham’s Law

The book Good Money (Selgin, 2008) already showed us that the idea of Gresham’s law as a natural feature of free market is just plain wrong. Historical evidence of anti-Gresham’s law is so rare that it is even more important to report them.

Chen & Lai (2012) add another piece of evidence from China. Pecquet & Thies (2010) provide evidence from New Orleans (U.S.A.).

(Updated post : March 2015)

Theory behind the Gresham’s Law

But first, let’s recall the principle of this law. Simply, it says that bad money drives out good money, which reminds us of Akerlof’s lemon markets. The difference here is that the lemon markets are inherent to the free markets. And austrian economists usually believe that legal tender laws solely activate Gresham’s mechanisms. Imagine that 1 ounce of gold is equivalent to 15 ounces of silver in the market rate. The government fix the exchange rate to 1/20. Gold is overvalued and people get more silver for each ounce of gold than what they should have in a free market. Because silver is undervalued, people will stop making contracts that stipulate silver payments. And silver will disappear from the circulation on this country and may be sold to another country where silver has higher price.

When a given currency has the privilege of legal tender laws, it has a fixed exchange rate and thus circulates at a given face value. If the price of coin M is not allowed to vary according to its intrinsic value (its metallic content), when this coin M is traded against coin N, people seeking profits can remove coins M of its content because debasement of that coin is not reflected in its price. The debased or light-weight coins M are overvalued and full-bodied coins N are undervalued. As a result, coins of type N are melted down to be turned into lighter ones. The ultimate consequence is that if people are not allowed to freely value the prices of each coins, the good coins (N) will be withdrawn from the circulation. Hülsmann (2008) discusses legal tender laws.

The idea that legal tender laws activate Gresham’s law has been attacked by various authors. We will review their argument and provide an answer.

Fixed transaction cost (Rolnick & Weber, 1986)

Rolnick & Weber (1986) call that law a fallacy, believing that such laws enforcing fixed rate of exchange cannot be maintained because “it would imply potentially unbounded profits for currency traders at the expense of a very ephemeral mint or a very naive public” (p. 186). Bad money will drive good money out of circulation, according to them, but only when use of the good money at its market (nonpar) price is too expensive. Since small change is expensive to use at a nonpar price, they expect small denominations of the money undervalued at the mint to be scarce while large denominations circulate at a premium. They cite several historical accounts in order to show that despite legal tender laws, people didn’t follow the rules by adopting the fixed exchange rates, and that transaction costs (the Rolnick & Weber’s law) can better explain these facts in terms of fixed exchange cost.

Rolnick & Weber (1986) cite several experiences that appear to contradicts the Gresham’s law. The period between 1792 and 1853 in U.S.A. contains two such exceptions. One is the U.S. experience with the Spanish milled dollar (good money), which was a heavier coin than the U.S. silver dollar (bad money), containing about 373.5 grains of pure silver compared with 371.25 grains in the U.S. dollar, and over this period it had legal tender standing. From 1792 to 1811, the Spanish dollar circulated at a premium (of 0.25% to 1%) over the U.S. dollar. It continued to circulate at a premium in later years. The U.S. silver coins failed to drive out the Spanish dollars. Instead of being exported or hoarded, that good money circulated at a premium. The other U.S. experience involve gold and silver. Between 1792 and 1834, the U.S. mint overvalued silver. On April 2, 1792, the Congress passed a coinage act establishing a ratio of 15 to 1, the par price, between silver and gold coins, which was the market price in 1792. But soon after, the market price for gold rose and remained higher than the par price until June 24, 1834, when the second major coinage act raised the par price to 16 to 1. After mid-1834 and until the early 1850s, when Congress reduced the silver content of all small-denomination coins, the status of gold and silver currency was reversed. The ratio of 16 to 1 was higher than the market price for gold and remained so for the rest of the century. In this period, gold became the mint’s overvalued money. In reality, when gold was undervalued at the mint (1793-1833), 25% of the coinage was still gold, and when silver was undervalued at the mint (1834-46), 45% of the coinage was silver.

Rolnick & Weber (1986) cite two more examples in the U.S.A. One experience was during the early part of the greenback era (1862-79). Greenbacks were legal tender. Because of speculation on the outcome of the war and resumption, the gold price of these notes fell from their par value when first issued to 91 cents on the dollar by June 27, 1862, and to 84 cents by July 22, 1862, and below 40 cents by July 22, 1864. Specie (gold and silver) was the undervalued money. In the West, despite the presence of greenbacks, gold remained the unit of account and a medium of exchange. Greenbacks were current there but at a discount. In the East it appeared that the money system was reversed, as greenbacks were accepted as the unit of account and specie circulated at a premium. The other experience was at the time just after the Bland-Allison Act of 1878, when the Congress authorized the minting of another silver dollar, the so-called Bland dollar (412.5 grams of silver) which circulated with the trade dollar (420 grams of silver). Both of these were U.S. silver dollars. The Bland dollar was current at par, and the trade dollar circulated at its gold price, which varied around 93 cents. By 1880, the lighter-weight Bland dollar (legal tendered) failed to drive out the heavier-weight trade dollar and also managed to circulate at a higher price than the heavier-weight dollar.

Rolnick & Weber (1986) cite one experience from England in the 17th century, when the English mint began producing a new gold coin (guinea) along with the silver shilling. The guinea was first issued in 1663 at the mint price of 20 shillings, yet it never circulated at that price, and although not inscribed with any shilling denomination, was legal tender for all payments, including taxes, at 20 shillings. In 1663 this mint price was well below the guinea’s market price; that is, the guinea was undervalued at the English mint, and the shilling was overvalued. For many years, the premium was no more than 2. The price of guinea remained, thus, at 21.5 shillings.

These examples are used to show that legal tender laws didn’t force people to trade at par. But these examples, they say, also show that transaction costs matter. Their theory predicts that undervalued large-denomination currency would circulate at a premium while undervalued small-denomination coins would disappear. This tendency stems from the fact that paying premiums on small-denomination currency tends to be more costly than paying them on large-denomination currency; there are economies of scale in using currency at nonpar prices. During the silver standard period (1792-1833), of the undervalued currency, only the large denominations seem to have circulated. At that time, undervalued large-denomination currency consisted of gold coins and Spanish dollars that contained more silver than the U.S. dollar. While most of the gold was exported, the Spanish dollar circulated for many years at a premium. The small change available during this period consisted of U.S. silver coins and a substantial amount of Spanish coins. The small-denomination Spanish coins contained less silver than the U.S. coins, and the undervalued small U.S. coins had trouble circulating.

Selgin (1996) answered Rolnick & Weber’s (1986) criticism by saying that their theory of transaction cost (Rolnick & Weber’s law) does not replace Gresham’s law. Both of these effects can co-exist. Selgin argues that the failure to adopt par exchange, in the examples cited by Rolnick & Weber (1986), is due to the fact that there was no punishment (and thus no cost) for infringing the law : “Such laws operate, not by actually laking legally fixed exchange rates operational, but by making it costly or at least risky for sellers to communicate their monetary preferences to buyers.” (p. 641). So, when nonpar exchange is costly, due to legal tender laws, exchange costs are minimized by employing money that trades at par only. The sellers who attempt to place a discount on bad money or refuse it altogether may be punished while the would-be buyers who report such discrimination may be rewarded. This situation is akin to a prisoner’s dilemma : sellers would price their goods in terms of bad money rather than good money because they want to avoid legal penalties involved in refusing bad money while buyers would incur losses if they offer good money to a seller whose prices are in terms of bad money. This results in an equilibrium, in which bad money will be used as both medium of account and medium of exchange, that does not depend on laws explicitly favoring bad money or making the use of good money illegal.

Selgin (1996, p. 644, fn. 9) says that the sovereign authorities may sometimes fail to enforce the circulations of their coins at par. Selgin (1996, p. 646) also says that the bimetallic regimes (United States from 1792 to 1834) cited by Rolnick & Weber (1986) did not involve any explicit sanctions against most nonpar exchanges involving either metal. Selgin finally cites three episodes where legal tender laws explicitly punish infringements, and the results were in accordance with the conventional view of Gresham’s law, contra Rolnick & Weber. Selgin argued that how strict legal tender laws must be to give effect to Gresham’s Law remains an open question.

Information asymmetry (Dutu, 2004)

Dutu (2004) and Dutu et al. (2005) argue that asymmetric information can also activate Gresham’s law. They cite several instances in Europe where the practice is widespread. They focus on moneychangers, due to their major role in exchanges. Moneychangers exchange large denomination coins for small denomination ones, and cried down coins for authorized ones. They were thus the main metal suppliers for the mints, thanks to the metal gathered through their activity.

So, what are they guilty of ? Moneychangers appeared in the middle of the 12th century and were widespread all over Europe by the 13th century. They specialized in gathering and selling information on money. They seek profits through two means. Billonnage, by comparing the intrinsic content of two supposedly identical coins and paying with the bad but keeping the heavier ones. Arbitrage, by taking out the coins that were undervalued out of one place and bringing them where they were relatively overvalued.

This was possible because the intrinsic content of the coins was difficult to assess for most people. Of relative importance, Dutu (2004) focused on the great variety of coins, the imperfect coinage technique, frequent mutations, wear, and the poor communication network. As we shall see, the story told by Selgin (2008) reveals that the key element of this theory is plain wrong. It is competition that reduces the benefit of making fake coins through the multiplication and variety of coins, not the contrary. And it is competition that helps to improve coinage techniques.

Dutu (2004) argues that even if moneychangers were allowed to price two supposedly identical coins differently, they had no interest in doing so because buyers could not tell the coins apart. In this case, it would also have been profitable for them to sell their services in the detection of good and bad coins, as it was the case in Great Britain (Selgin, 2008). So, the scenario described by Dutu (2004) is clearly not the only possible outcome. Perhaps there were even some laws that have caused troubles in the circulation of information and caused people to adopt moral hazard behaviors like what happened with Enron when accounting expertise were found to be dishonest.

In light of what has been said, if Gresham’s law is still activated despite the absence of legal tender laws, one may wonder whether some restrictions at another level are operating. According to Dutu (2004, p. 561), money changing was the monopoly of a small group in some regions (e.g., Paris and Bruges). And in some others, they operated freely (e.g., Brussels and Liege). But that does not mean that the mints had free competition. As noted by historians, the reason why the few episodes of free banking and free coinage did not last is because the government would lose an extraordinary source of seigniorage profits. When it comes to money, regulation is the rule.

Even if Gresham’s law is activated, that may not last very long. The private sector may find substitutes, as they did in Great Britain when the government failed to supply enough coins of good quality (Selgin, 2008). Unless thick layers of regulations don’t allow the emergence of these substitutes.

Today, we don’t use such valued coins but paper money instead. And Dutu et al. (2005) admitted explicitly that Gresham’s law cannot apply to modern economies. Gold and silver coins were melted and recoined as lighter ones but today the coins, bills and deposits have no intrinsic value and thus are not melted. Certainly, the government’s control over the money could have reduced the intrinsic value of the money to nothing. Still, even in a free market economy, paper money will be the medium of exchange and valued coins or commodity money will remain in the banks, eventually leaving for bank clearing (Selgin, 1988). The relevance of Gresham’s law also diminishes due to the use of credit cards and electronic money today.

Historical evidence of Gresham’s Law

Tudor England

Selgin (1996) tells us that in Tudor England there was no such thing as freedom of contract in the modern sense. Persons caught profiteering from the internal exchange of coin at other than its par value were subject to fines and imprisonment as well as the forfeiting of any unlawfully exchanged sum. Such laws meant that a buyer had the right to offer in cash payment any coin issued by the mint, and that a seller had to accept such coin at face value regardless of its intrinsic value. The sellers adopted bad coin as their medium of account – a choice reflected in the substantial increase in prices following each episode of debasement. Buyers in turn offered sellers payment in bad money only, returning good coins to the mint in exchange for a share of the (nominal) seigniorage. By early 1549, most of the good (nine-tenths or ten-twelfths fine) silver coins that had been in circulation prior to the debasements had been reminted into coins containing less than half as much silver. By the time of Elizabeth’s accession, debasement had seriously eroded the real value of other nominally fixed government revenues, as well as the public’s real demand for money. Gresham advised the Queen that her only recourse was to restore the coinage by “bringing your basse mony into fine of xi ounces,” a standard last seen in 1527. In September 1560, the Queen took Gresham’s advice, while insisting at the same time that taxes be paid in new coin. As soon as its legal-tender status was revoked, bad money began to be supplanted once again by good money.

Continentals (U.S.A.)

Selgin (1996) tells us that, On January 11, 1776, when the Continentals were only five months old, Congress resolved that whoever should refuse to receive Continentals at par should be deemed and treated as an enemy of his country, and be precluded from all trade and intercourse with its inhabitants. States adopted similar resolutions. For instance, on December 27, 1776, the Pennsylvania Council of Safety decided that if any person shall refuse to take continental currency in payment, or for any goods or commodity offered for sale, or shall ask a greater price for any such commodity in continental currency than in any other kind of money or specie, the person so offending shall be considered a dangerous member of society, and forfeit the goods offered for sale or bargained for, to the person to whom the goods were offered for sale or by whom they were bargained for, and shall moreover pay a fine of 5 pounds to the state; and every person so offending, shall for the second offence be subject to the aforementioned penalties, and be banished from this state, to such a place and in such manner, as this Council shall direct. The award for informing on discriminating sellers and lenders offers an incentive to make legal tender laws even more effective. The Pennsylvania resolution was, moreover, as harsh on sellers who would place a premium on good money as it was on those who would place a discount on bad money, explicitly contradicting Rolnick and Weber’s assertion (1986, p. 193) that a premium on good money would not be in violation of legal-tender laws. These legal-tender laws gave effect to Gresham’s Law precisely to the extent that they failed to secure the actual exchange of good money at par, while successfully discouraging its circulation at a premium. Specie was seldom seen except upon its initial disbursement by newly arrived English and French troops. For the most part specie went into hoards, emerging only after Congress officially recognized its free-market value relative to paper money on 16 March 1781.

French Revolution

Selgin (1996) tells us that during the French Revolution the 1793 Convention, finding that paper Assignats had depreciated substantially relative to specie, decreed that any person selling gold or silver coins, or making any difference in any transaction between paper and species, should be imprisoned for 6 years; that anyone who refused to accept a payment in assignats, or accepted assignats at a discount, should pay a fine of 3 thousand francs; and that anyone committing this crime a second time should pay a fine of 6 thousand francs and suffer imprisonment 20 years. Some months later the same crimes were made punishable by death along with the confiscation of the criminal’s property. As in revolutionary America, rewards were given to informants, while penalties grew more severe. Such laws caused Assignats to replace specie as France’s medium of account while suppressing open quotations of any premium on specie. Instead of being offered in exchange, specie went into hoards, prompting the government to threaten confiscation of any concealed metals. Twelve men actually lost their heads for hoarding specie, on the grounds that they had intended to pay it to the enemy.

Chosun Korea

Kim (2004) relates one episode in the late Chosun Korea. The standard copper currency called sangp’yongt’ongbo (ever-normal cash) had circulated since 1678 in the Chosun dynasty. As the debasement of sangp’yongt’ongbo was not sufficient to meet an ever-increasing fiscal expenditure, the Taewongun administration circulated a large-denomination currency, named tangbeckchon (100-cash), in 1867. It was not formally convertible into ever-normal cash. The nominal value of 100-cash (bad money) was 100 times the nominal value of ever-normal cash (good money) whereas the intrinsic value of the former was only 5-6 times higher than that of the latter; the fixed rate was 100:1 and the market rate was 5-6:1 and the denomination of 100-cash was 100 times that of ever-normal cash. The state council declared a new legal tender law on 7 January 1867, eight days before 100-cash was about to circulate. Exchange rate was fixed between the two coins because of the law that penalized nonpar exchange. Since ever-normal cash was undervalued, the consequence was that ever-normal cash was taken out of circulation. As more and more 100-cash was poured into the economy, prices rose rapidly. The public tried to escape from these negative consequences and to substitute stable ever-normal cash for 100-cash. In response to this situation, the Taewongun introduced a much more stricter legal tender law on 23 February 1868 that henceforth all payments including taxes to the government agencies throughout the country must be made exclusively in 100-cash. Kim’s (2004) report is exceedingly confusing, but it seems that in the end, the government withdrew 100-cash in the final stage of the episode because of its inflationary effect (and the major part of the returned ever-normal cash seems to come from people’s hoarding). Total supply of 100-cash dramatically increased to 16 million yang for a short period of only 6 months until 16 June 1867. This amounted to approximately three times the total volume of ever-normal cash coined during the period from 1807 to 1850s. As a result, the price of rice soared from 7–8 yang per sok in December 1866 to 44–45 yang per sok in about two years. It went up by approximately 600% during such a short period of 2 years. The monthly rate of inflation is estimated to be 7.3–7.5%. Kim (2004) argues that this story confirms the conventional view that legal tender law causes bad money to drive out good ones, but also confirms Rolnick & Weber’s law. This is curious because there is nothing in the details reported by Kim that would confirm Rolnick & Weber’s (1986) theory. That small-denomination is driven out of circulation says nothing about Rolnick & Weber’s law because legal tender laws actually favored large-denomination coins.

Historical evidence of anti-Gresham’s Law

Great Britain (Birmingham)

Selgin (2008) told us the story of the Birmingham button makers in the Great Britain. The regal coins issued by the Royal Mint couldn’t satisfy the exceeding private demand for coins. But manufacturers and other businessmen succeed to supply the necessary tokens. It appeared that the Royal Mint couldn’t rival the private mints, which coins were of much higher quality so as to become historical documents. In fact, higher quality makes counterfeiting more difficult, and so the Royal Mint coins were counterfeited by a much greater scale.

There were multiple reasons why the private sector was making coins of good quality. According to Selgin (2008 p. 137) :

It did so, first of all, because nice coins were good publicity. At a time when there was no national press and when advertisements still consisted of mere notices, tokens “were one of the few media where persuasive – even aggressive – advertising could flourish” (Mathias 1962, 36). Although every token was good for some sort of publicity, the treatment of tokens as advertising platforms is most obvious in some tokens issued by retailers.

The story tells us that fakes can be easily detected and were not widespread. Counter-intuitively, competition makes counterfeiting more difficult. This is because a slight difference in coinage by false coiners is easily detected, thanks to the presence of multiple private mints having their own techniques and designs for making coins (Selgin, 2008, pp. 141-142). The emergence of a collectors’ market, surely owing to the high quality of the coins, helped a great deal to the detection of false coiners. This is even more remarkable, considering that counterfeiting was legal (Selgin, 2008, p. 144).

China (Han Dynasty)

Chen & Lai (2012) tell us about the story of China (Han Dynasty). The free coinage policy under Emperor Wen (179-157 BC) produced coins of greater quality than the central coinage policy of the Emperor Wu (140-88 BC).

What are the ingredients of the success ? In China, the existence of a money-weighing law (MLW) requires that all circulating coins must be checked using an official money scale. Otherwise the user would be punished with ten days of forced labour. MWL guaranteed that all circulating money would be scrutinised. That law was widely applied throughout the empire. With the use of the scale, when buyers tendered bad money to purchase commodities, the seller would ask for more money to compensate for the underweight coins (according to the quality of coins as judged by the money scale).

The MWL was an important device for supporting Emperor Wen’s free coinage policy. In the first step, the government provided a standard form of money with a specified metal content (fineness). In the second step they encouraged people to mint coins, and these had to meet the minimum requirements as specified. In the third step they enforced the use of the standard money scale as a public arbitrator, to distinguish good money from bad.

As the number of competitors increased, in order to sell more coins, the coiners would have to improve the quality of their coins and excess profits would decrease until equilibrium was reached. Ultimately, the confidence in private coinage was the consequence of market mechanism.

Good money drives out bad - a note on free coinage and Gresham's law in the Chinese Han Dynasty (Chen & Lai 2012) Table 1

Table 1 illustrates the quality of some ancient Chinese coins. Column (a) shows the officially claimed weight of the coin when minted, where the basic unit is zhu (0.651 grams). Column (b) shows the average weight of the coin as found in an archaeological site. Column (c) shows the ratio of the actual to the claimed weights, which reveals the degree of debasement: below 100% means the quality of the coin is degraded, over 100% means its quality is higher than the official standard. Column (d) shows the copper content of the coin (fineness), as reported from laboratory analysis. Column (e) then compares the copper content of each standardised gram in various coins. The usefulness of this comparison is evident from the indexes in column (f). We use the copper content of each standardised gram of the first coin in column (e) as the base (0.43g=100) against which to compare the quality of other coins.

The coins minted under Emperor Wen and Emperor Jing (179–141 BC) have the highest quality (index=205). Column (e) shows that the copper content of the coins was obviously lower under the central coinage regime. The four-zhu (sizhu) coin minted during the reigns of Emperors Wen and Jing (179–141 BC) contains 0.88g of copper for each standardised gram, while the same four-zhu coin minted during the reign of Emperor Wu (140–88 BC) contains only 0.73g of copper for each standardised gram. There are more sizhu (four-zhu) samples from archaeological sites. First, we have 430 sizhu coins minted during the reigns of Emperors Wen and Jing (179–141 BC, free coinage), with a total weight of 1,223.15g and an average weight per coin of 2.84 g. Second, we have 75 sizhu coins minted under Emperor Wu (140–88 BC, central coinage), with a total weight of 174.3g and an average weight per coin of 2.32 g.

This was for the anti-Gresham’s law. But in the Qin Empire (221-206 BC), the emperor has forced people to accept all types of money in circulation. Bad money was driving out good money. Then, the Empire was unable to issue a sufficient quantity of good quality new coins in the short term. Interestingly, this episode resembles what happened to the Royal Mint in Great Britain (Selgin, 2008). Anyway, the state stipulated that all existing coins were legal and usable if they satisfied four conditions: they were not seriously damaged, they were not made with lead, the inscription was identifiable, and the diameter was greater than 1.8 centimetres. Anyone who refuses the money was punished and private minting was now illegal.

And finally, the Emperor Jing has adopted in 144 BC the central coinage policy that has ended the first and only free coinage golden age in Chinese history. The sizhu became unstable in weight and fineness. But ultimately, the quality of the coins has deteriorated. 10,436 five-zhu coins were found. The average weight of these five-zhu coins decreased from 3.35g (minted under Emperor Wu, 140–88 BC), to 3.26g (minted under Emperor Zhao, 87–75 BC), and then to 3.07g (minted under Emperor Xuan, 74–50 BC, and Emperor Ping, 1–5 AD). The average weight of the five-zhu coins continued to decrease, reaching 2.86g in the Eastern Han Dynasty. The downgrade in quality, according to the authors, was mainly due to the pressure of state finance.

New Orleans (U.S.A.)

Pecquet & Thies (2010) report the story. During the first year of occupation in 1862 by Federal troops, when the Union commander repudiated the city’s Confederate currency, the money supply of New Orleans was thus destroyed by the repudiation of Confederate currency and the diminished usefulness as money of the notes and deposits of the weaker banks of the city and of the notes of the stronger ones. As the money supply was declining, the city government of New Orleans faced a significant deficit.

In 1863, the city government issued a large amount of municipal scrip, which included a range of denominations from change notes to 20 dollar bills, which had no specified maturity date and were not redeemable in any form of money. But, they were acceptable for city taxes and, thus, they could be said to have been tax-backed. Through 1864, the cumulative amount of municipal scrip issued was arguably small relative to the need of the city for a medium of exchange. Even though the only backing for these notes was that they were receivable by the city for taxes, they passed in retail transactions at par, and were the main hand-to-hand currency and the standard of value in retail transactions through early 1866. In larger transactions and with brokers, they exchanged for at most a small discount. By the end of May 1863, the New Orleans Bee reported that city treasury notes circulated at par while Greenbacks commanded small premiums varying from 1–2% to 2.5–3.5%. By the end of 1863, the paper reported that, although both currencies traded at par in retail transactions, brokers required a one half percent premium for legal tender notes.

But beginning in 1865, several factors undermined municipal scrip, including (1) the revival of banking, (2) growing concerns about overissue, and (3) certain actions by both city and federal authorities. The revival of banking might have begun in 1863 with the return of the Louisiana State Bank to its management early in the year and with the incorporation of the First National Bank of New Orleans later in the year. However, through 1864, uncertainties plagued the state-chartered banks of the city. These uncertainties involved the possible recovery of the specie taken from them by the Confederates, the enforcement of the claims of the banks against planters, and the value of the state and municipal bonds held by the banks. With the end of the war, these uncertainties were generally resolved in favor of the state banks, resulting to a rise in the value of bank notes and deposits to par for all but one of the city banks.

Large-denomination scrip becomes uncurrent. The city’s net emissions of scrip proceeded at a rapid pace. From 1864 to 1867, the quantity of city notes in circulation increased from $2.3 to $4.0 million. During 1867, state scrip became uncurrent within New Orleans. About the same time, the banks refused to accept New Orleans municipal scrip as deposits and broker discounts for New Orleans municipal notes increased to about 5%. The continuing emissions by the city to deal with its own financial troubles soon renewed the depreciation of the city scrip.

Small-denomination scrip also becomes uncurrent. By late 1867, New Orleans city officials wanted to completely end the acceptability of municipal scrip for taxes. At some point, the General Hancock himself undermined the city notes by rejecting the tax-backing of state notes. Thereafter, Louisiana state notes could be accepted only for tax arrears or redeemed by some other mechanism such as swap for state bonds. Immediately, the value of Louisiana state scrip plunged in the currency markets from 30% to 50% discounts against the U.S. dollar. At this point, the market value of small-denomination city scrip fell to a point where retailers balked at receiving it because of the substantial cut they were taking from brokers. Overnight, the city’s retail stores refused to accept small-denomination city scrip in trade.

So, in the end, the municipal notes were accepted as soon as its value is stable but were being dismissed as soon as its value plummet due to issuance of municipal notes in excess of the demand. This exemplifies how people choose money when legal tender laws and punishments are not enforced.


There are few historical evidence but they lead to the same observation. Good money drives out bad money. We have seen there are many ways by which the market can sort out the good and the bad.


  1. Chen, Y. L., & Lai, C. C. (2012). Good money drives out bad: a note on free coinage and Gresham’s law in the Chinese Han Dynasty. Economic History of Developing Regions, 27(2), 37-46.
  2. Dutu, R. (2004). Moneychangers, private information and Gresham’s law in late medieval Europe. Revista de Historia Económica/Journal of Iberian and Latin American Economic History (Second Series), 22(03), 555-571.
  3. Dutu, R., Nosal, E., & Rocheteau, G. (2005). Tale of Gresham’s law. Economic commentary.
  4. Kim, Y. Y. (2004). Gresham’s law in the late Chosun Korea. Applied Economics Letters, 11(15), 979-984.
  5. Pecquet, G. M., & Thies, C. F. (2010). Money in occupied New Orleans, 1862–1868: A test of Selgin’s “salvaging” of Gresham’s Law. The Review of Austrian Economics, 23(2), 111-126.
  6. Rolnick, A. J., & Weber, W. E. (1986). Gresham’s law or Gresham’s fallacy?. The journal of political economy, 185-199.
  7. Selgin, G. (1996). Salvaging Gresham’s Law: The Good, the Bad, and the Illegal. Journal of Money, Credit and Banking, 637-649.
  8. Selgin, G. A. (2008). Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821. University of Michigan Press.
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