Gresham’s law

Gresham’s law

octobre 28, 2017 0 Par Michel Santi

In economics, the bad always drives out the good. This is the main point of the law derived by Gresham, a financial advisor to Elizabeth I during the 16th century. At the time, in England and elsewhere, silver coins were in circulation but were not of equal purity. Consumers and retailers would greedily keep hold of the ones that had a higher proportion of silver in them and get rid of the less silvery ones first. Gresham’s law thus left an indelible mark on the Middle Ages since – in the end – only coins of mediocre quality were being exchanged in daily trade whereas those that were a degree higher in purity were hoarded, used on the black market, or melted down. The bad money thus prevailed over the good money, a bit like us who – now – prefer to pay with our used, worn and torn notes first so as to save the notes that are in a better state. This is a typical – and this time totally harmless – example of Gresham’s law, a law that takes us as far as sorting the notes in our wallets so as to spend the ones in the worst state first!

Nowadays, India – which is undergoing demonetisation – is colliding head on with Gresham’s law after its authorities unilaterally decided last year to withdraw all denominations from circulation, including the 100 Rupee note that is widely used by the whole spectrum of consumers and retailers. The average Indian greedily hangs on to about thirty 100 Rupee notes in their wallet now, whereas before the process of demonetisation they only held four or five on average. Moreover, the notes’ life expectancy in the hands of the consumer is around 15 days, whereas they would be used in about 2 or 3 days before. These bills are now being ravenously hunted down and credit card payments find themselves widely privileged (when retailers accept them), which means that these precious banknotes are being held on to for as long as possible. Throughout the subcontinent the 100 Rupee note is therefore now deemed to be “good” money, whose circulation and exchange has become all but static in favour of credit and debit card payments that, in this case, make up the “bad” money that Indians are looking to get rid of as quickly as possible.

It is an extremely damaging consequence of the risky choice to demonetise India, a process that has once again hit the poor the hardest since it is they who do not own and use credit or debit cards. The grocer, the barber, the corner shop keeper, they have therefore all suffered a brutal collapse of their turnover due to the new rarity of these banknotes, and to the fact that consumers generally don’t have the opportunity or means to pay by card. The State has admittedly set up cash machines, but they mostly only give out 2000 Rupee notes – which are of course highly prized by organised crime and fraudsters – but which are also totally useless to the average citizen just trying to get by. In an economic climate where cash transactions used to make up nearly half of the country’s GDP and more than three quarters of its wage payments prior to demonetisation, Gresham’s law is now drastically intensifying India’s precariousness and destitution.