Cryptocurrency – wholly digital, privately-owned medium of exchange – is booming right now. Part of this phenomenon can be explained by the state of the economy, as well as an economic principle known as “Gresham’s Law.” In fact, the state of affairs in late medieval France – also a time of inflation and economic uncertainty – has much to tell us about the digital economy.
Named for the Tudor statesman Thomas Gresham (1519–1579), Gresham’s Law would, in my opinion, be better called “Oresme’s law,” after the French philosopher Nicole Oresme (1325–1382). Though the idea Oresme articulated in his Tractatus De Origine, Natura, Jure et Mutationibus Monetarum (“Treatise on the origin, nature, law, and alterations of money”) had been known since ancient Greece, he was the first writer we know of who expressed it formally. Ironically, Gresham never wrote about the law named after him; it was only given that appellation by economist Henry Dunning McLeod in 1860. Some also call it the Gresham-Copernicus law, since the sixteenth-century astronomer also wrote about the phenomenon – but there can be no doubt that the basic idea is thoroughly medieval.
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Oresme’s Law (if I may call it that) is simply this: in a situation where the value of money is dependent on its bullion (gold or silver) content; and rulers continually raise revenue by collecting the coinage, melting it down, skimming off some of the gold or silver, and then casting new money with less precious metal; then the new, “bad” money will drive the high-bullion “good” money out of circulation as people hoard the old money and spend the new. This also causes inflation, as people will not accept the “new” money at the same face value as the old. Such was the state in France when Oresme wrote for the benefit of the young King Charles V; it was also the state in England when Gresham urged Elizabeth I to restore confidence in the coinage that has been debased by her father, Henry VIII.
(Another interesting phenomenon is that, if you have “light” and “heavy” coins in foreign trade, the “heavy” coins will tend to be spent and go overseas since they are worth more. This is what happened during the Peloponnesian War, when the Athenians had to buy food from overseas due to the Spartan land blockades; as Aristophanes noted in his play The Frogs, all the best Athenian coins were in other cities. However, though this is worth mentioning, it doesn’t really bear upon my cryptocurrency argument.)
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Of course, today we have fiat money instead of a gold standard. However, the basic principle still holds true, only with different currencies taking the place of “heavy” and “light” coins from the same nation – specifically, with cryptocurrency taking the place of the old, high-bullion coinage. If you allow this caveat, then you’ll see that in modern America we are in a somewhat similar situation to medieval France in a few aspects. First, there is rampant inflation, which means that if you simply put your money into a savings account, it will actually decrease in value. Similarly, there is little trust in the ability of the established monetary system, including the volatile stock market and investment plans linked to it, to hold value. Furthermore, crypto cannot be readily spent; the IRS taxes it as property, meaning that it is wiser to hold onto it and hope it increases in value (as it has so far), rather than try to use it as currency. This means that putting one’s savings into, say, Bitcoin, is in some ways taking it out of circulation in the same way that the medieval “heavy” money was hoarded.
People therefore have an incentive to spend their ever-weakening dollars on goods and services (ironically, the opposite of the Athenian situation since so many of our goods come from overseas), while putting their excess capital into crypto instead of stocks and other investments that are ultimately linked to dollar-backed securities. In another similarity to our current woes, the economic uncertainty of the late fourteenth century was also linked to a dearth of labor – today, people dropping out of the workforce – back then, actual deaths because of the Plague.
Unlike the fourteenth century, however, the cycle that causes crypto to increase in value is inherently self-reinforcing. This will cause the cryptocurrency to continue to increase in value until, eventually, governments either attempt to outlaw it, as China has done (which would be unsuccessful and likely trigger a crisis of confidence); attempts to liberate the value locked therein by accepting it as a currency in its own right that can be taxed and regulated (as El Salvador and Cuba have); or, like, the Dutch tulip mania of the 17th century or mortgage-backed securities in 2008, the bubble bursts in an unexpected and likely destructive fashion. If the second option prevails, as it hopefully will, we’ll be in another medieval-esque situation, where stable currency such as the gold florin circulated alongside the variable and debased silver currency of northern Europe.
By Ken Mondschein
Cryptocurrency – wholly digital, privately-owned medium of exchange – is booming right now. Part of this phenomenon can be explained by the state of the economy, as well as an economic principle known as “Gresham’s Law.” In fact, the state of affairs in late medieval France – also a time of inflation and economic uncertainty – has much to tell us about the digital economy.
Named for the Tudor statesman Thomas Gresham (1519–1579), Gresham’s Law would, in my opinion, be better called “Oresme’s law,” after the French philosopher Nicole Oresme (1325–1382). Though the idea Oresme articulated in his Tractatus De Origine, Natura, Jure et Mutationibus Monetarum (“Treatise on the origin, nature, law, and alterations of money”) had been known since ancient Greece, he was the first writer we know of who expressed it formally. Ironically, Gresham never wrote about the law named after him; it was only given that appellation by economist Henry Dunning McLeod in 1860. Some also call it the Gresham-Copernicus law, since the sixteenth-century astronomer also wrote about the phenomenon – but there can be no doubt that the basic idea is thoroughly medieval.
Oresme’s Law (if I may call it that) is simply this: in a situation where the value of money is dependent on its bullion (gold or silver) content; and rulers continually raise revenue by collecting the coinage, melting it down, skimming off some of the gold or silver, and then casting new money with less precious metal; then the new, “bad” money will drive the high-bullion “good” money out of circulation as people hoard the old money and spend the new. This also causes inflation, as people will not accept the “new” money at the same face value as the old. Such was the state in France when Oresme wrote for the benefit of the young King Charles V; it was also the state in England when Gresham urged Elizabeth I to restore confidence in the coinage that has been debased by her father, Henry VIII.
(Another interesting phenomenon is that, if you have “light” and “heavy” coins in foreign trade, the “heavy” coins will tend to be spent and go overseas since they are worth more. This is what happened during the Peloponnesian War, when the Athenians had to buy food from overseas due to the Spartan land blockades; as Aristophanes noted in his play The Frogs, all the best Athenian coins were in other cities. However, though this is worth mentioning, it doesn’t really bear upon my cryptocurrency argument.)
Of course, today we have fiat money instead of a gold standard. However, the basic principle still holds true, only with different currencies taking the place of “heavy” and “light” coins from the same nation – specifically, with cryptocurrency taking the place of the old, high-bullion coinage. If you allow this caveat, then you’ll see that in modern America we are in a somewhat similar situation to medieval France in a few aspects. First, there is rampant inflation, which means that if you simply put your money into a savings account, it will actually decrease in value. Similarly, there is little trust in the ability of the established monetary system, including the volatile stock market and investment plans linked to it, to hold value. Furthermore, crypto cannot be readily spent; the IRS taxes it as property, meaning that it is wiser to hold onto it and hope it increases in value (as it has so far), rather than try to use it as currency. This means that putting one’s savings into, say, Bitcoin, is in some ways taking it out of circulation in the same way that the medieval “heavy” money was hoarded.
People therefore have an incentive to spend their ever-weakening dollars on goods and services (ironically, the opposite of the Athenian situation since so many of our goods come from overseas), while putting their excess capital into crypto instead of stocks and other investments that are ultimately linked to dollar-backed securities. In another similarity to our current woes, the economic uncertainty of the late fourteenth century was also linked to a dearth of labor – today, people dropping out of the workforce – back then, actual deaths because of the Plague.
Unlike the fourteenth century, however, the cycle that causes crypto to increase in value is inherently self-reinforcing. This will cause the cryptocurrency to continue to increase in value until, eventually, governments either attempt to outlaw it, as China has done (which would be unsuccessful and likely trigger a crisis of confidence); attempts to liberate the value locked therein by accepting it as a currency in its own right that can be taxed and regulated (as El Salvador and Cuba have); or, like, the Dutch tulip mania of the 17th century or mortgage-backed securities in 2008, the bubble bursts in an unexpected and likely destructive fashion. If the second option prevails, as it hopefully will, we’ll be in another medieval-esque situation, where stable currency such as the gold florin circulated alongside the variable and debased silver currency of northern Europe.
Ken Mondschein is a scholar, writer, college professor, fencing master, and occasional jouster. Ken’s latest book is On Time: A History of Western Timekeeping. Click here to visit his website.
Click here to read more from Ken
Click here to read more on Gresham’s Law and our current economic situation
You can read more about Bitcoin and inflation here
Top Image: Crypto360 / Flickr
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