Gresham's Conjecture
We learn it as "Gresham's Law" the claim that "bad money drives good money from the market." But the general rule has many exceptions.
From 1878-1904, the US Mint struck over 24 million ounces of silver dollars per year, far in excess of anyone's demand, to meet the political agenda of Western mining interests. The Comstock Lode and other strikes flooded the markets with cheap silver and the price of it fell relative to gold. Nonetheless, silver dollars sat in bags; and even today fully one-third are in uncirculated condition. According to Gresham's Suggestion, silver dollars should have driven gold dollars from the market. They did not.
3-cent silvers circulated alongside 3-cent nickels, both them along with 3-cent "fractional currency" notes from the Treasury.
More here:
http://necessaryfacts.blogspot.com/2012/...
From 1878-1904, the US Mint struck over 24 million ounces of silver dollars per year, far in excess of anyone's demand, to meet the political agenda of Western mining interests. The Comstock Lode and other strikes flooded the markets with cheap silver and the price of it fell relative to gold. Nonetheless, silver dollars sat in bags; and even today fully one-third are in uncirculated condition. According to Gresham's Suggestion, silver dollars should have driven gold dollars from the market. They did not.
3-cent silvers circulated alongside 3-cent nickels, both them along with 3-cent "fractional currency" notes from the Treasury.
More here:
http://necessaryfacts.blogspot.com/2012/...
Interesting Wikipedia article on the US Note (the precursor to the Federal Reserve Note):
http://en.wikipedia.org/wiki/United_Stat...
Excerpt: the effect of the Civil War Legal Tender acts:
...the option to exchange the notes for United States bonds at par had been revoked, and notes of $1 and $2 denominations had been introduced as the appearance of fiat currency had driven even silver coinage out of circulation.
There's bad money driving out good. What brought silver coinage back into circulation?
1875: The Specie Payment Resumption Act:
...required the government to redeem them [US Notes] for gold, on demand, after 1 January 1879. As a result, the currency strengthened and by April 1876, the notes were on par with silver coins which then began to re-emerge into circulation.
I recently read an article where Hayek was discussing Legal Tender and a caveat to Gresham's Law here:
http://mises.org/daily/4546
http://necessaryfacts.blogspot.com/2011/...
(More on this later... out the door now...)
We know, for example that during the Civil War, the fear that the North would lose drove metallic money into hoards. It was not the legal tender notes, but the fact that the South had better officers, and needed only to win a defensive war. Fortunes for the North remained grim until 1864. Postage stamps circulated as small change. To make them convenient, one JOHN GAULT patented a holder of brass and mica. These things are RARE today. So, they did not actually fill the need for small change on the street, or only partially so.