Queen Elizabeth I had inherited several problems upon ascending to monarch. From religious, government, economic, and foreign issues the list would be overwhelming. However, let's focus on the economy, because without a good economy and good economic policy nations fail and fall; when Queen Elizabeth I began her rule, neither was good for Britain. From a massive debt to rapid inflation, depreciated exchange and trade along with corruption were all substantial issues facing the nation. Many of these issues came from debasement of coinage.
Prior to her father King Henry VIII (1509-1547), England had a stable currency, with silver coinage being struck in a .925-fine sterling silver standard. Henry VIII lived extravagantly and his lavish royal spending along with expensive wars with France and Scotland (1544-1546) left drained the treasury and in debt. Like many monarchs and kingdoms before him, in 1544, Henry VIII took the shortsided and quick fix of debasing the coinage to create more money. The silver content of his coinage dropped to .750 fine and eventually .333 fine. His son and successor, Edward VI, continued this standard until he ended the debasement policy in 1551 with coins then being struck at the sterling standard of .925 silver, a coinage now referred to as the “fine silver issue”. Following Edward VI’s short reign, Queen Mary (1553-1558) would continue the .925 fine coinage as would her successor Queen Elizabeth I (1558-1603). However, coins issued during the Great Debasement continued to circulate amongst the finer, sterling silver issue with the same nominal values. This led to the hoarding of sterling coins with the debased silver coins continuing to circulate. It was not until 1560, 56 years after debasement started, that Elizabeth I initiated the recall of all debased currency.
Gresham’s Law can be boiled down to “bad money drives out good money.” When bad money is introduced, a lower amount of gold or silver, or even none at all, the more precious money is hoarded and removed from trade, undermining the value of all circulating money. Public confidence often collapses and inflation rises as the purchasing power of the new money has decreased. International trade often suffers as this is done with precious metal value not as governmental denominated coinage. While Sir Thomas Gresham wasn’t the first to observe and understand this principle, he is credited with the concept as he advised Queen Elizabeth I on fixing the problem.
Sir Thomas Gresham was a merchant, financier, and a royal agent in Antwerp. He had served as financial adviser to King Edward VI, Queen Mary I and after her accession in 1558 Queen Elizabeth I. His expertise was managing England’s royal debts abroad. What Elizabeth I had inherited was economic chaos and with Gresham’s explanation of the cause of the problem, the debased or bad coinage of her father, brother, and sister, the solution was to restore the standard of her grandfather Henry VII. With this new coinage couldn’t just be issued, old debased coinage needed to be removed from circulation and melted in order for the good, full-value money to stay in circulation and for the money to retain full value. With Gresham’s advice, Queen Elizabeth I instituted the recoinage reform of 1560. The new coins were minted at the return of a .925 sterling silver standard. After 1560, monetary stability was restored to England and confidence allowed for easier European trade.
It would be a Scottish economist Henry Dunning Macleod, in the 1850s who would coin the term “Gresham’s Law.” The first used phrase “Gresham’s Law” would be published in 1858. While Macleod credits Gresham for this law of observation, it was known since ancient times with Aristophanes from the 5th century BCE being the earliest source. The idea had also been published by Copernicus in 1526 in Monetae Cudendae Ratio (translated to: “On the Minting of Coin”).
Regardless of credit, Gresham’s Law is something that should be thought of as an important historical and economic idea. Even today as the concept of money changes we can look at Gresham’s Law to understand current economic trends and changes.