In explanation of this phenomenon was formulated Gres ham's law of the circulation side by side of coins of differ ent bullion value : bad money drives out good money. Sir Thomas Gresham (whose name has but recently been given to this so-called law) explained the principle to Queen Eliza beth when counseling her regarding the recoinage of the de based money of the realm, as was done in 1560. He showed that when old worn coins were in circulation and the mint began putting out full-weight coins, the old lighter ones re mained as money, while the new ones, being heavier, were picked out by jewelers and others needing to send money abroad.
Gresham's law has a paradoxical wording and is frequently misunderstood. "Bad money," as he used the term, meant, not counterfeit money, but merely worn coins that have a bullion value less than that of some other money then in circulation. But such "bad money" will not always drive out "good money." The law applies only under certain conditions and within certain limitations. The "good" will be driven out only if the total amount of money in circula tion is in excess of what would be needed if all were of full weight and of best quality. Paradoxically speaking, if there is not too much money altogether, the bad money is just as good as the good money. But, even if good money is driven out, it may not leave the ?country. It may be hoarded, or be pinked out by banks and savings institutions to retain as their reserves, or be melted for use in the arts. Gresham's "law" becomes thus a practical precept. As ap plied to the plan of recoinage it is: Withdraw worn coins as rapidly (in equal numbers) as you put new coins into circulation.
The continued circulation of "bad" money alongside of "good" money (light-weight alongside of full-weight coins), as long as the total number of coins is not in excess of the money demand for full-weight coins, is explained thus on exactly the same principle as is the circulation at parity of a light-weight fractional coinage, in the preceding section. § 6. Seigniorage on standard money. The fiduciary coinage problem presents itself under a somewhat different guise in case a seigniorage charge is made on all coinage, even of that metal used as the standard unit. In this case coinage might be free but not gratuitous. Then no bullion would be brought to the mint unless the coined pieces the owners received had a value equal to the bullion value plus the seigniorage charge. The power to impose a seigniorage charge is a monopoly power, a power of artificial limitation.
The number of coins that can be issued without depreciation is limited to that number which would circulate if they were made full weight without a seigniorage charge. With this number of pieces, the money demand of the country is at the saturation point for full-weight metal coins. If more coins could in any way be put into circulation they would be worth less as mosey than as bullion, and would be melted or exported.
Assume that this full supply of gold money at the satura tion point is 100,000 pieces or dollars; then consider the effect of imposing a seigniorage charge of 10 per cent on further coinage. If business or population did not increase, and until through loss, by fire and in other ways, and through use for industrial purposes, the quantity of money had been reduced below this point, the seigniorage charge would have no effect, and there would be no desire to change gold from bullion form into coin. But when any or all of these suggested changes take place, the value of the mone tary unit relative to the bullion value will begin to rise. It will take on a monopoly value due to the limitation of coin age. When it has risen until the coin will buy any more than one ninth more bullion than was in it, the citizens will begin to take metal to the mint. After the 10 per cent charge is taken out they will receive a coin which, though containing one tenth less bullion, will be worth very nearly the same as the metal taken to the mint. No depreciation could take place unless the volume of business fell off so that less money was needed than before. In that case there would be no outlet for the excess of coins until they fell to their bullion value, i. e., till they lost the entire value of the seign iorage, the monopoly element in them. Melting or exporting them before that point was reached would cause to the owner the loss of whatever element of seigniorage value they con tained.
We thus have arrived at the general principle of seignior age: when coins are not issued beyond the saturation point, a seigniorage charge raises the monetary value of the money material above its bullion, that is, its commodity, value. And this holds good of a large seigniorage charge as well as of a small one, even up to the extreme limit of a charge of 100 per cent. In this last case the government would retain the whole of the bullion brought to it and would give in return a piece of money made of material paper) with a negligible value.