In this article, the authors try to refute the argument that states the legal tender law is the only way to force the use of bad money (overvalued) and the hoarding of good money (undervalued). They say... Gresham's Law could be explained by "information asymmetry", when it is difficult to tell one coin from another.
Coin B still contains only 90 percent of the silver in coin A, but now both of them have the same imprint and the same shape. An individual who is offered a coin may not know whether it is a type A or a type B, unless he is a coin expert. Situations in which agents face difficulties in recognizing coins could arise for many reasons: Imperfect coinage techniques, wear and tear, clipping (shaving small pieces of metal from the rim), hidden debasement, and counterfeiting. When it is difficult to verify a coin’s intrinsic quality, A and B tend to be traded at the same price. In this case, coin A will be undervalued and coin B will be overvalued. Though controlled, mint masters might have been tempted to produce low-quality coins and pocket the difference between the required and actual quality of a coin. Indeed, bad coins were cheaper to produce but they could be passed off to uninformed individuals as good coins. Money experts, such as moneychangers, also had an incentive to engage in opportunistic trading in this system. Experts could sort out the heavier coins, use the lighter ones for payments, then melt the heavy coins and recoin them as light coins, keeping the difference as a profit. Another example of experts’ role in activating Gresham’s law comes from Copernicus (1473–1543) who, commenting in 1526 on the monetary reform carried out by the king of Poland, wrote that “[g]oldsmiths and those specialized in precious metals take advantage of our misfortune. They sort out ancient coins, melt them, and then sell the silver, always receiving from inexperienced persons more silver with the same amount of money. When older coins have almost disappeared, they choose the best from the rest and just leave the worst currencies.”
Any thoughts ?
Rodolphe Topffer:On contrary, if they choose to be honest they do not make any profit.
That's not a weird argument but a merely weak one. The more flagrantly you cheat, the more you make per transaction but the less transactions you make -- your profit converging to zero. Thus, the more flagrantly everyone cheats the easier it becomes for one to make an honest profit. Also, the more flagrantly the minters cheat, the higher the costs (damages) to the cheated, thus the more likely they are to support Consumer Reports on Mints to make an honest mint by evaluating the cheaters.
Btw, there was no Prisoner's Dilemma in your example, and you devolved Gresham's Law to simply mean: "If A is crap, then there's more of it. If there's a lot of A around, then it's probably crap." -- which is not a "law" but a mere tautology.
Z.
unless he is a coin expert.
It's the job of minter to make such coin comparisons easy...it is the only way their mints would be demanded
Read until you have something to write...Write until you have nothing to write...when you have nothing to write, read...read until you have something to write...Jeremiah
Ok. Suppose the minters choose to trick their clients : they sort out good coins, melt them, sell the precious metal... every time they receive good coins. And they will perpetually repeat the process. If all of them do the same (prisoner's dilemma), they make a lot of profit. On contrary, if they choose to be honest they do not make any profit. I know... it's a weird argument. So, where am I wrong ?
Your going wrong in your assuption that collusion between companies has ever existed for any subtantional amount of time without government regulation. Rothbards speeks about this in length in one of his lectures. Unfortuantely there is too much to gain via market share by breaking from collusion and, in this case, offering gold coins that are legtimate. Given this, exchanges need not involve minted coins, gold may be weighted and exchanged
Coin B still contains only 90 percent of the silver in coin A, but now both of them have the same imprint and the same shape. An individual who is offered a coin may not know whether it is a type A or a type B, unless he is a coin expert. Situations in which agents face difficulties in recognizing coins could arise for many reasons: Imperfect coinage techniques, wear and tear, clipping (shaving small pieces of metal from the rim), hidden debasement, and counterfeiting. When it is difficult to verify a coin’s intrinsic quality, A and B tend to be traded at the same price. In this case, coin A will be undervalued and coin B will be overvalued.
This is, of course, quite possible, but it doesn't refute Gresham's law. First, the validity of Gresham's law is most obvious when there are arbitrary exchange ratios fixed between two different monetary units. For example, when the exchange rate between gold and silver is fixed at some arbitrary and incorrect rate, the "good" currency (arbitrarily undervalued) is hoarded (taken out of domestic circulation), while the "bad" currency is used for domestic exchange. You can't explain this phenomenon by solely referring to ignorance/irrationality. The validity of Gresham's law has always been inconvenient for statist money cranks.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
To confirm asymmetric information theory, Richard Dutu relates some facts.
- Many moneychangers were in fact caught culling the best coins and transporting moneys or bullion from one city to another.
- From 13th century onwards, debasements were widespread in Europe. When the debasement was unofficial, only the Master of the Mint knew about it. He had to pledge never to disclose the information. If the secret was kept and the weakening was not too obvious, nothing happened until the secret was disclosed. But the mint masters and moneychangers worked closely together. The secret of the weakening could not be kept very long (As noted by Bigwood (1921) on Belgium, previous moneychangers were often elected as mint master and vice versa). - Charles IV, in a monetary ordinance of December 1325 concerning the change in Rouen, stated that : «We have got sufficient information that great troubles to us and others have been done [by unofficial moneychangers] in clipping florins and other moneys, and in accepting and putting into circulation bad and forbidden coins, and the ones from another type.» Brants reports a similar statement by a Mint Master: «Good money is driven out and the exchange and the Lombard take all the good gold and pay in the new currency.» - In 1476, in the city of Poitiers in central France, while the King had long been working to reassert his power over moneychangers, the goldsmith Raoul Bricheteau was prosecuted by the Court of Money for clipping gold crowns. - Like moneychangers, merchants started weighing the coins, putting aside those worth the most, melting them down and getting profit from them. In a court report it is noted that: «De Huguenin Pelletier, from Cusery, and his son Jehan Pelletier, both merchants, because they have confessed that they have received several pennies from which they took the best and the strongest and brought them oftentimes to the Mint of Cusery to make profit [...]»
But he fails to demonstrate that ALL moneychangers and minters deliberately tricked "naive" people : he just said ...
"However, even if moneychangers were allowed to price two supposedly identical coins differently, they had no interest in doing so. Since buyers could not tell the coins apart, moneychangers would take advantage of the situation and sell both of them at the same price.".
Suppose he was right, the theory cannot explain gresham's law after all. Because it doesn't prevent people from using another medium (like paper bills).
Couldn't edit my post after it got verified... Just wanted to correct a consistent typo there: "fragrantly" should have been "flagrantly". Not much smelling sweetly or pleasantly when cheating is involved.
fixed that for you.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
When it is difficult to verify a coin’s intrinsic quality, A and B tend to be traded at the same price. In this case, coin A will be undervalued and coin B will be overvalued.
What you have, in this case, is really just a common currency with two different sources.
So the valuation, in fact, is accurate. It is based on the pooling of both issuers' money, because from the standpoint of the economy they are the same thing.
This is a perfect example of how the free market works better, and how bureaucrats get all confused by niggling details that don't matter to real society.
There may be individual cases where relatively poorer money is accepted and not rejected (just like some people accept fake hundred dollars bills today). The question is whether this is true in the long run, and I would argue 'no'. Furthermore, it also stands to reason that money issuers would have to compete to establish a precedent of reliability, culturing a long-term trend towards more reliable money.