Gresham Law and Ibnu Taimiyya in Economic Thought

Gresham Law is attributed to Sir Sir Thomas Gresham (1519 – 1579), an English financier in Tudor times. It simply stated “bad money drives out good.” This law is specifically applies if there two forms of money in market (especially commodity money), with establishment of force by a ruler, are forced to have face value in fixed ratio for marketplace transaction. This condition will drives out the good from people.

Gresham law defines good money and bad money. Good money is a money that has so little difference between its nominal and commodity value. Bad money is money that has substantial difference between its nominal and commodity value (fiat money is included in bad money). In the sense of Gresham law, fiat money is bad money because its commodity value is so little, almost zero. Fiat money relies entirely to government edicts for its legality. Since the amount of fiat currency is constantly increased through fractional reserve banking system, its value will tend to diminish across time.

Let gold coin (whatever in the form of gold dinar, Krugerrand (South Africa) or the American Gold Eagle (United States)) is good money and fiat currencies are bad money. In practice (assume gold coin is a legal tender like paper money), customer will prefer to pay using fiat currencies and keep the gold money for themselves because gold is more precious than paper money. Gold will gradually vanish from circulation because selfish people are stockpiling them. That is why it defines that “bad money drives out good.” Human has a selfish part in them by nature.

This had been stated long been before Gresham era by Ibnu Taimiyya, a sunni muslim scholar. Here he said:

If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches (amwal) which they possess, by decreasing their value as the old coins will now become merely a commodity. He will do injustice to them by depriving them of the higher values originally owned by them. Moreover, if the intrinsic value of coins are different it will become a source of profit for the wicked to collect the small (bad) coins and exchange them (for good money) and then they will take them to another country and shift the small (bad) money of that country (to this country). So (the value of) people's goods will be damaged.

This applied in condition of two forms of money are legal tender. So, in today era, when gold is not a legal tender by law, a person must make a choice. When government continue to use fiat currency, do anything to save ourselves is not a selfish action.

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