How to prevent the operation of Gresham's law and thus to avoid the evils which it involves has been one of the most difficult problems which governments have had to solve. During the middle ages its solution was sought in vain, and the monetary history of every European country during several centuries exhibits a succession of fruitless attempts to retain in concurrent circulation gold, silver, and copper coins pf the various denominations needed for commercial and governmental purposes. Finally, however, the solution was found, and no nation nowadays needs to be troubled by Gresham's law. So far as the concurrent circulation of coins made of different metals is concerned, the operation of this law is avoided by the device of making certain of the coins subsidiary to others which are called standard. In many countries at the present day the gold coins are the standard ones, and all others are made subsidiary by treating them in the following manner: -
(a) By reducing the quantity of the metal in them to such an extent that their intrinsic value is much below their face value;
(b) By limiting the quantity of them to the actual needs of the community for coins of these particular denominations;
(c) By limiting their legal-tender quality to small sums; and
(d) By making them redeemable in the standard coins. The explanation of the efficacy of these measures is obvious. So long as the silver, nickel, and copper coins are redeemable at their face value in gold coins, no one will hesitate to take them at that valuation, no matter, how much below it their actual intrinsic value may be The lowering of their intrinsic value by diminishing amount of metal used in their manufacture, therefore does not prevent their circulation at par, but it does prevent their disappearance from circulation in case of a considerable increase in the market value of the metal of which they are composed. For example, if an ounce of gold is equal in value to twenty ounces of silver, and the five-dollar gold piece weighs 125 grains and the one-dollar silver piece 400 grains, the value of the metal in the silver dollar is worth only eighty cents. So long, however, as the government stands ready to give a five-dollar gold piece for five silver dollars, each silver dollar will continue to circulate at its face value, and the value of silver would needs rise more than twenty-five per cent before the operation of Gresham's law would drive the silver coins out of circulation. The disappearance of the gold coins by the operation of Gresham's law and the impoverishment of the government on account of the demand for the exchange of silver for gold is prevented by the limitation of the quantity of the subsidiary coins minted and by making them legal-tender for small sums only. So long as the quantity of such money in circulation does not exceed the actual need for it for commercial purposes, there will be no disposition to demand its redemption, and so long as its legal-tender quality is limited, no one is obliged to receive it in large quantities, and consequently its general substitution for gold in the currency is rendered difficult, if not impossible. Indeed these four regulations place the control of the substitution practically in the hands of the government, at the same time giving it the power to prevent the operation of Gresham's law and to protect itself against loss.
The laws passed by the various nations for the regula-Ifcion of their subsidiary currencies differ considerably in details, but they all embody these principles. Special exceptions are sometimes made, as, for example, in the case of our silver dollars and the five-franc pieces formerly minted by the states of the Latin Union, but such exceptions must not be regarded as in any sense an abandonment of these principles or a demonstration of their use-lessness. On the contrary, the unfortunate experiences which have usually followed attempts to make exceptions in the application of these principles have confirmed their validity and demonstrated the danger of their violation.*