Gresham’s new law

In 1540s England, the money-saving hack was to pass off coins for more than the value of their metallic content.

There were several tricks to try.

One was “sweating” the coins: putting them in a bag and shaking them until friction caused silver dust to fall to the bottom of the bag — dust you could sell to a silversmith while still spending the coins at something close to face value.

Another was clipping them: cutting bits of silver off the edge of a coin while leaving the coin intact enough to pass inspection.

Others simply counterfeited them.

The most consequential trick, however, was played by the Crown itself: minting copper coins, “washing” them with a thin covering layer of silver, and then putting them into circulation at the value of pure silver.

These came to be known as “coppernose coins” because the silver would first rub off of the nose of the King’s portrait, revealing the base metal underneath.

None of this was original to Tudor England — the practice of debasing coins is probably as old as coins themselves.

But by the 1540s, sweating, clipping, counterfeiting and washing coins was so pervasive the face value of English money became meaningless: Every transaction required people to make a careful estimate of how much each coin might really be worth.

Rare was the coin worth its stated denomination. Coins of pure silver were hoarded, melted down, or sent abroad, leaving only what one contemporary called the “noythy money” — the naughty, debased coins — circulating as payment.

This happened often enough, in enough places, that it came to be known as “Gresham’s law” — Sir Thomas Gresham’s observation that bad money drives out good.

Surprisingly, it still applies.

Today, a US quarter has only about six cents worth of metal in it, so there’s little point shaking them up in a bag or clipping off the edges — and no point at all to clipping the edge off a dollar bill.

But bad money is still encroaching on good — it's just moved from the palm of your hand to an app on your phone.

Updating Gresham

In Beyond Banks, legal scholar Dan Awrey offers a simple definition of “good” money: money that’s guaranteed to be accepted at face value. 

Bad money is money that might not be.

We don’t often think in those terms any more. We worry about debasement in the sense of inflation — our dollars buying less — but not about our dollars being accepted as less than a dollar.

Awrey argues we should, though, because not all dollars are made equal.

Good money is created by banks, he explains: money that’s been legally engineered — by bankruptcy law and deposit insurance, for example — so that we never have to wonder whether it will be accepted at face value. Think of the dollars in your pocket or your bank account.

But those aren’t the only kinds of dollars we use. We also use money that’s outside the conventional banking system. 

By Awrey’s definition, this is bad money: PayPal and Venmo balances, the stablecoins in our digital wallets — none guaranteed to be accepted at face value.

We increasingly use these forms of money — without any thought to how good or bad they might be — because they’re more convenient than bank money. 

This behavior calls for an update to Thomas Gresham’s law.

Awrey calls it Gresham’s new law: his observation that good payments drive out good money.

This is an inversion of the original. 

“In Gresham’s original law, it’s all about the qualities of money that drive payment patterns,” Awrey explains, “and in Gresham’s new law, it’s all about the qualities of payments that are driving monetary patterns.”

In other words: We once spent bad money because we didn't want to hold it; now we hold bad money because it's so easy to spend.

Gresham’s new law predicts we’ll hold more and more of it: “The technological advances that deliver faster, cheaper, and safer payments often far outpace the changes to our laws and institutions that deliver sound money,” Awrey writes. 

Stablecoins are exhibit A.

When people say stablecoins will be used for things like cross-border transactions, instant settlement on the stock market, and agentic AI, that is Gresham’s new law in action: Better payments technology causing bad money to push out good money.

The problem is that the law can’t keep up with technology.

Payments technology, Awrey explains, “has moved far faster than the laws and institutions that might be used to transform these monetary IOUs into good money.”

This, he warns, can lead to trouble: “While these institutions and platforms are using code to solve important problems in payments, they are often creating new problems for the safety and stability of our monetary system.”

Problems such as the growing threat of cyber-fraud and the weaponization of the payment system as an instrument for social control.

— Byron Gilliam

_{Brought to you by:}

US Treasuries are the lifeblood of our financial system, providing collateral to support transactions, but outdated legacy systems hinder collateral mobility.

A new white paper from the ValueExchange dives into the future of collateral mobility, RWA tokenization, and what we can learn from a recent series of on-chain repo transactions conducted on Canton, the only public blockchain built for institutional finance.

With over $8T tokenized transactions flowing on Canton every month, including over $350B of on-chain US Treasuries moving daily, Canton is building the scalable, always-on capital markets infrastructure of the future.

DAS NYC's lineup is bringing the biggest names in finance to the stage.

Don't miss the institutional gathering of the year — this March 24−26.