Dollar, rupee and Gresham’s law

IN 1558, when Elizabeth I ascended the throne of England, a plethora of challenging circumstances confronted her. Not least was the low demand for English coinage (there was no paper-based money back then). English residents appeared to be fonder of other European currencies. Put another way, demand for English money was low. But even more puzzling was the observation that the non-English European coinage was getting difficult to find. Perplexed by this, the queen wrote a letter to Sir Thomas Gresham, an experienced financier. In his reply, Gresham put forth a simple proposition — good and bad money cannot circulate together. Additionally, he stated that bad money would drive out the good money. Gresham’s observation came to be known as ‘Gresham’s law’. But he was not the first one to observe this phenomenon. It had been known since the Greek times. From time to time, some observer would notice this particular relation playing out. For example, Ibn Taimiyyah (1263-1328) noticed the same. (Interestingly, he also alluded to the outflow of good money to offshore destinations, analogous to the wealth flowing to offshore havens in our times!)