The monetary history of most civilised nations, up to quite a recent date, is a long record of failures to keep the currency in a proper condition of repair, failures marked by extreme ignorance of the general laws which govern all currency systems, and marred by a long list of severe penal statutes, intended to take the place of this want of knowledge, statutes, which, in spite of their extreme severity, were generally inoperative. In our own country, fresh issues of new coins were from time to time made, only to disappear almost immediately. The coins in circulation were worn, clipped, debased, and of a bewildering multiplicity of design and weight. The weaker portion of the community necessarily suffered greatly, and the less scrupulous found a constant harvest of profit ready at hand.

The most important of these principles, and the one most constantly ignored, is that known as Gresham's law. It is, of course, a scientific law, not a political law. A scientific law is the expression of a universal tendency which experience has shown to follow certain conditions through the action of a known cause. A political law, or legislative enactment, says that a certain course of events must take place; a scientific law states that a certain event does occur under stated conditions.

Gresham's law is named after an Elizabethan knight, founder of the Royal Exchange, who is supposed to have inspired a Royal proclamation in which the law is first stated. Although first published as early as Elizabeth's reign, the law was not generally recognised until long after, and this early statement of the law was only one of several aspects in which it can be viewed.

In its earliest and simplest form it is expressed as follows: "If coins of the same metal, but of varying weight and quality, circulate together at the same nominal value, the worse coins will tend to drive the better from circulation, but the better will never drive out the worse"

Legislators could not understand why people should prefer the light coins to those of full weight, and when they issued new full-weight coins they constantly expected them to take the place of the worn coins already in circulation, and were as constantly disappointed. A little reflection will, however, show that the action of the law is quite in accord with the elementary facts of human nature. The essential feature of the coinage is that it is meant to be circulated, to be passed on, and when a man has to part with anything, he naturally parts with the least valuable, provided it will exchange for as much as the more valuable article.

We must remember that until modern banking methods were developed, men saved money by hoarding coins in a chest or the traditional old stocking, and the newest and heaviest coins would be selected for this purpose. Even in these days of scientific knowledge, most men, although they gain nothing by it, have a lurking inclination to keep a brand new coin, fresh from the Mint, when it comes into their possession. In days when the condition of the coinage left much to be desired, and when the possession of a light coin meant a probable loss to its owner, this tendency was very strong. Again, money changers and others who exported coin or bullion, would have to make good any deficiency in the weight of the coins they exported, for in international transactions currency always goes by weight and not by tale. Therefore, such men would withdraw the heavy coins from circulation. Thirdly, the fraudulently inclined could, with very slight risk of detection, and with certain profit to themselves, clip and "sweat" the newer coins so as to reduce them to the general level of those in circulation.

This, then, is the operation of Gresham's law in its simplest form. The heavy coins disappear from circulation, not necessarily from the country. Some are exported or melted down, others are hoarded, and some are fraudulently depreciated in weight; to use a popular phrase, "the bad money drives out the good."

Now let us turn to a currency in which two precious metals are used, and both circulate concurrently at a mutual valuation fixed either permanently or from time to time by the State, and we shall find another application of the same law. In such circumstances we shall find that the value of the two metals, which we will take to be gold and silver, towards each other, will at most periods exhibit two distinct ratios.

First, there is the ratio of the market value of the two metals as bullion, which varies within certain narrow limits from day to day, in obedience to the usual market influences which affect all commodities; and secondly, there is the State ratio at which the coins of the two metals are declared current - the "Mint ratio" as it is now called. So long as these ratios, the Mint ratio and the market ratio, remain identical, Gresham's law will be inoperative, but experience has shown that it is a matter of extreme difficulty, if not of impossibility, to keep these ratios for long at the same figure.

Directly a divergence occurs there is a tendency for the coins of the over-rated metal to drive the under-rated from circulation. Take the case of the Japanese currency at the time when that country was first opened up to European influences. At that time coins of gold and silver circulated at a ratio of about 5 to 1, which was approximately the market ratio in that country. The European trader was not long in discovering that he could buy an ounce of gold in Japan for about five ounces of silver and that this same ounce of gold was in Europe worth about fifteen ounces of silver. Of course the Japanese gold coinage rapidly disappeared from circulation.

Take another instance from English history. When gold was first coined in appreciable quantities in England, in Edward I.'s reign, it constantly disappeared from circulation through being underrated. Gold "florences," or florins were proclaimed current at six silver shillings. But at the market value of the two metals to each other the florin was worth, we will say, seven silver shillings. By melting a gold florin and selling the bullion to a goldsmith seven shillings could be realised, while it would only settle a debt of six shillings at the proclaimed valuation. Consequently, people paid their debts in silver, and hoarded, melted or exported the gold, because this was the cheaper method.

We will then formulate this second application of Gresham's law as follows: - If coins of two precious metals be circulated at a fixed ratio of exchange with one another, the overvalued metal will tend to drive the undervalued from circulation.

There is a third form of this important principle applying to the relations between a metallic coinage and a paper currency. The excessive issue of paper money has been one of the most frequent causes of monetary confusion in the history of modern nations. So long as the paper money is redeemable in coin or bullion on demand, any excessive issue will soon automatically correct itself, but when in periods of acute financial embarrassment a government is driven to the expedient of issuing an inconvertible paper currency, great self-restraint is necessary to prevent an over-issue. So long as the limit is not exceeded, the limit prescribed by the usual needs of the commercial community, an inconvertible currency can retain its value unless the credit of the government is unusually bad; but so soon as the issue becomes excessive, gold tends to disappear from circulation and the paper money becomes depreciated in value.

The abnormal increase in the amount of the currency results in a fall in its value and a rise in the price of commodities. Other nations find it cheaper to pay in goods than in gold or silver, and the surplus currency is gradually exported. Needless to say this exported surplus takes the form of coin or bullion, for other nations will not accept paper. The ensuing scarcity of coin encourages hoarding, and the stock of the precious metals in circulation rapidly dwindles. If the issue of paper still continues the next result is a divergence between paper prices and gold or silver prices. Gold or silver is said to be at a premium, paper is "depreciated." At this stage paper is obviously the cheaper medium for payment by the debtor, and the remainder of gold and silver all but entirely disappears.

In a later chapter we shall see the above tendency at work in this country, when the Restriction of Cash Payments at the end of the eighteenth century became the means of thoroughly ventilating the subject. For the present it is sufficient to note the working of the law in its third form: If an inconvertible paper currency be issued in excess, that is to say, to such an extent that the total amount of the currency becomes greater than the normal amount required by the country, it will tend to drive the precious metals from circulation.

These are the three applications of Gresham's law. It is perhaps necessary to explain that the law as originally formulated only covered the first of these phases. But since all three are but modifications of the same idea and are based upon the same general principle, it is expedient to classify them under the same generic title. The application of the law in some one of its phases is constantly claiming the attention of the student of monetary history, and a thorough grasp of its working is of vital importance.