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| | == Gresham's Law == | | == Gresham's Law == |
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| − | In Economics we often learn powerful concepts that seem surprising at first, or which we would not think of otherwise. Opportunity cost is one. The Coase theorem is another. The Law of Diminishing Marginal Utility is a third. Returns to scale is a fourth. The list seems never-ending, and perhaps a student in this course will discovery a new Economics insight that will be taught to future students. Appreciating any one of these key concepts can yield enormous benefits to you the rest of your life, both with business and beyond. | + | In Economics we often learn powerful concepts that seem surprising at first, or which we would not think of otherwise. Opportunity cost is one. The Coase theorem is another. The Law of Diminishing Marginal Utility is a third. Returns to scale is a fourth. The list seems never-ending, and perhaps a student in this course will discover a new Economics insight that will be taught to future students. Appreciating any one of these key concepts can yield enormous benefits to you the rest of your life, both with business and beyond. |
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| | Here is another surprising discovery in Economics: "bad money drives out good." If there are two types of money in an economy, then people will prefer using the weaker type when they buy goods and will want to save or hoard the better type. Before long the weaker, or "bad", form of money dominates the marketplace as everyone tries to get rid of it. The better form of money is saved up and rarely makes it to the market. | | Here is another surprising discovery in Economics: "bad money drives out good." If there are two types of money in an economy, then people will prefer using the weaker type when they buy goods and will want to save or hoard the better type. Before long the weaker, or "bad", form of money dominates the marketplace as everyone tries to get rid of it. The better form of money is saved up and rarely makes it to the market. |
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| − | Imagine if people used both gold, which is a strong form of money, and paper dollars, which is weaker than gold because it loses value in inflation. Which would they use when buying groceries or other goods? People would prefer to pay with the weaker dollars and save the gold at home. Everyone would prefer to use the weaker money in transactions. A visitor from a foreign country would seem mostly dollars in circulation, and very little gold. Hence the "bad money drives out the good." Cheap money tends to drive the better money out of circulation in the market. | + | Imagine if people used both gold, which is a strong form of money, and paper dollars, which is weaker than gold because it loses value in inflation. Which would they use when buying groceries or other goods? People would prefer to pay with the weaker dollars and save the gold at home. Everyone would prefer to use the weaker money in transactions. A visitor would see mostly dollars in circulation, and very little gold. Hence the "bad money drives out the good." A cheap form of money tends to drive the better form of money out of circulation in the market. |
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| − | In 19th century America, both silver and gold were accepted currency (as in 19th century America). But silver was a weaker form of money, and thus people preferred to buy things in silver rather than gold. People wanted to save the gold for themselves and get rid of the silver. The result is that the cheaper currency (silver) would be used more often in market transactions, and the gold is driven out of the market. "Bad money drives out good." | + | In 19th century America, both silver and gold were accepted currency (as in 19th century America). But silver was a weaker form of money, and thus people preferred to buy things in silver rather than gold. People wanted to save the gold for themselves and get rid of the silver. The result is that the cheaper currency (silver) would be used more often in market transactions, and the gold would be driven out of the market. "Bad money drives out good." |
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| − | This law is named after Sir Thomas Gresham, who was the Master of the Mint under Queen Elizabeth I in the 1500s.
| + | Gresham's Law is named after Sir Thomas Gresham, who was the Master of the Mint under Queen Elizabeth I in the 1500s. |
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| − | ===Applied beyond Economics=== | + | ===A Brief History of U.S. Money=== |
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| | + | On July 6, 1785 -- two years before the Constitutional Convention drafted the U.S. Constitution -- our young nation unanimously selected the dollar to be the monetary unit. This was the first time in history that a country selected a decimal system (rather than a fractional system) for its money. |
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| | + | From 1785 to 1974 -- nearly 200 years -- our dollar was backed by gold or silver or both, and some politicians (such as Congressman and former presidential candidate Ron Paul) urge that we return to the "gold standard" for the dollar in order to guard against inflation. Gold is in limited supply in the world, and inflation can be controlled by tying the dollar to something in limited supply. That way more and more dollars could not be printed by the government, which decreases their value. |
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| | + | We used a system of "bimetallism" from 1792 to 1873, by which the dollar was "backed" (could be traded in for) gold or silver. A ratio of 15:1 was used; someone received 15 times as much silver as gold for a dollar. Led by Republicans after the Civil War, Congress gradually phased out the use of silver because it was considered to be a cheap, inflationary form of money, and in 1900 an entirely gold standard was adopted. Recall from history how William Jennings Bryan made his famous "Cross of Gold" speech (in favor of retaining silver as a standard and thereby avoid being "crucified" on gold) in obtaining the Democratic nomination for president in 1896. Bryan lost. |
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| | + | But gold eventually lost out also, and was removed as the standard in 1974. Now the U.S. dollar is backed by nothing but a belief that it will continue to have value. Perhaps one might say it is backed by the American economy, or the U.S. Constitution and our political system. |
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| | + | ===Applying Gresham's Law beyond Economics=== |
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| | Recall back to the beginning of this course when I mentioned that our learning would extend beyond money. Gresham's Law is an example of that. It has significance far beyond money and economics. Let's pause for a moment and consider the implications. | | Recall back to the beginning of this course when I mentioned that our learning would extend beyond money. Gresham's Law is an example of that. It has significance far beyond money and economics. Let's pause for a moment and consider the implications. |
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| − | What happens when something "bad", such as a serious crime, happens in a neighborhood? It tends to decrease the value of the homes and drive out the "good", as people move away. Similarly, what happens when some arrives in a group and starts to use lots of profanity. It tends to lower the quality of the conversation. Before long, other people are using profanity in the group and some people leave it altogether. The "bad" drives out the "good". | + | What happens when something "bad", such as a serious crime, happens in a neighborhood? It tends to decrease the value of the homes and drive out the "good", as people move away. Similarly, what happens when someone arrives in a group and starts to use lots of profanity. It tends to lower the quality of the conversation. Before long, other people are using profanity in the group while some people, perhaps disgusted, leave the group altogether. The "bad" drives out the "good". |
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| | In public schools, as students wear unattractive clothing like Goth it tends to cause other people to dress worse; as students start to goof off and stop working it becomes contagious and others start to imitate them. Again, the "bad" drives out the "good". | | In public schools, as students wear unattractive clothing like Goth it tends to cause other people to dress worse; as students start to goof off and stop working it becomes contagious and others start to imitate them. Again, the "bad" drives out the "good". |
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| | Even on a personal level, the "bad" can drive out the "good". Watch television a while and you may find that your mind becomes sluggish and dull, with a poor attention span. The "bad" of television drives out the "good" in your mind. Spend the same amount of time reading the Bible, and you may discover that your mind becomes sharp and quick and focused. Many great minds, such as Isaac Newton, read the Bible daily and found it brought their level of thinking to new heights. Does the "good" of the Bible drive out the "bad"? | | Even on a personal level, the "bad" can drive out the "good". Watch television a while and you may find that your mind becomes sluggish and dull, with a poor attention span. The "bad" of television drives out the "good" in your mind. Spend the same amount of time reading the Bible, and you may discover that your mind becomes sharp and quick and focused. Many great minds, such as Isaac Newton, read the Bible daily and found it brought their level of thinking to new heights. Does the "good" of the Bible drive out the "bad"? |
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| − | Once we realize that the "bad" drives out the "good", it becomes possible to anticipate and correct it. The "bad" can be prohibited, excluded, or stopped immediately as it occurs. Better yet, can the "good" drive out the "bad"? | + | Once we realize that the "bad" drives out the "good", it becomes possible to anticipate and correct it. The "bad" can be prohibited, excluded, or cut off immediately as it occurs. Conversely, the "good" (such as prayer) can be encouraged and promoted. |
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| − | The converse of Gresham's Law would be this: the "good" drives out the "bad". | + | The converse of Gresham's Law is this: the "good" drives out the "bad". |
| | It seems to work. No one hears profanity in church, or is afraid of being robbed there. The greatest achievers in world history would read the Bible daily. Even before Christianity, Alexander the Great slept with a copy of the masterpiece book the ''Iliad'' under his pillow. Napoleon, Stonewall Jackson, George Washington, and other successful military leaders made an effort to have the "good" of the Bible drive out the ugly side of war. | | It seems to work. No one hears profanity in church, or is afraid of being robbed there. The greatest achievers in world history would read the Bible daily. Even before Christianity, Alexander the Great slept with a copy of the masterpiece book the ''Iliad'' under his pillow. Napoleon, Stonewall Jackson, George Washington, and other successful military leaders made an effort to have the "good" of the Bible drive out the ugly side of war. |
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