To start this conversation, we first have to understand what Gresham’s Law is. In its simplest form, it is a monetary principle stating that "bad money drives out good". If there are 2 forms of money (currency) in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation.
At this point I’d make sure you really understand the difference between money and currency. If you don’t yet know, I’d highly recommend you watch the free “Hidden Secrets of Money” YouTube series in full.
Back to Gresham's Law, "good money" is money that shows little difference between its nominal value (the face value) and its commodity value (the value of the metal of which it is made, often precious metals (gold and silver), nickel, or copper). At this point whether you believe Bitcoin is a good money or not, you can’t argue that 1 bitcoin in 2010, 2015 and today in 2021, is the same coin. Since inception the quantity has changed only by the agreed number (as per the protocol) and is ultimatly capped at 21 million. “Bad money” (we really should be saying bad currency here) is money that has a commodity value considerably lower than its face value and is in circulation along with good money, where both forms are required to be accepted at equal value as legal tender.
This is a natural point to stop and mention the Nixon shock - series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold. In layman terms, this simply means that the world monetary system (every single currency in the world) for the last 50 years has been based on the dollar that is backed by NOTHING. This is a good example of bad money (currency).
Is it any wonder that most people around the world today don’t even know what a gold coin looks or feels like. For 50 years, world currency has been flowing into gold and gold has been disappearing out of circulation (Gresham’s Law at work)
Also worth noting, this announcement from Nixon was a temporary measure, we are still waiting for it to change some 50 years later. Maybe those who have given so much “temporary” power to their leaders through this latest episode we are currently experiencing should take note.
But let’s not dwell on this now, is this something new? No it is not, unfortunately, we as humans really enjoy making the same mistakes over and over again. Here we are in China, Yuan dynasty, Ibn Taimiyyah (1263–1328) described the phenomenon as follows:
“If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches which they possess, by decreasing their value as the old coins will now become merely a commodity. He will do injustice to them by depriving them of the higher values originally owned by them. Moreover, if the intrinsic values of coins are different it will become a source of profit for the wicked to collect the small (bad) coins and exchange them (for good money) and then they will take them to another country and shift the small (bad) money of that country (to this country). So (the value of) people's goods will be damaged.”
Changing gears, lets think about the growing wage and inequality gaps across the globe we are seeing today and all the social turmoil. What could possibly have happened in and around 1972 to cause these chart lines to deviate?
Chart from: https://www.epi.org/productivity-pay-gap/
What the chart above shows is exactly what happened in China 700 years before. Rulers changed the money from gold backed money to unbacked currency. Those that knew about the game, accumulated gold from $35 and profited wildly and still do today with the price north of $1700. Business owners, have accumulated assets from their corporate productivity gains, and the workers have received unbacked currency in exchange for their labour. And this all started when the money was destroyed. The wage and inequality gap will continue to widen until the money is fixed.
So what is Thier’s Law?
Rolnick and Weber (1986) argued that bad money would drive good money to a premium, rather than driving it out of circulation (the item to consider here is the bitcoin premium today (60k April 2021) - remember when it was $150).
During the great inflation in the Weimar Republic in 1923, Gresham's Law worked in reverse, official currency became so worthless that virtually nobody would take it. That was serious because farmers began to hoard food and any currency, backed by any sort of value became a circulating medium of exchange. In 2009, hyperinflation in Zimbabwe began to show similar characteristics, with people resorting to barter and using neighbouring countries currency.
So in the absence of effective legal tender laws, Gresham's Law works in reverse. Given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. However, if not given the choice and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession and to pass on the bad money to someone else. A great example of this is the recent announced by Elon Musk allowing customers to pay for a new Tesla with Bitcoin. Do you think he wants more or less Bitcoin?
The reverse of Gresham's Law, that good money drives out bad money whenever the bad money becomes nearly worthless, has been named "Thiers' law" by economist Peter Bernholz in honor of French politician and historian Adolphe Thiers.
"Thiers' Law will only operate later [in the inflation] when the increase of the new exchange rate and the increase rate of inflation lead to the lowering of demand for the inflating money."
So in simple terms, when the Gold/USD or BTC/USD rates increase in an inflationary environment expect the demand for dollars to decline (demand for Gold and Bitcoin to therefore increase).
This is not advise, all circumstances are different, so individuals should always seek independent financial advice, please ensure you have read our disclosure.
