Explaining Gresham’s Law with Pocket Change
By Leo Leksang
Edited by Holly Jean Soto
Most of us overlook our pocket change. We allow it to accumulate, and then get rid of it as fast as we can. Not a lot of value is placed on U.S. coins, but by reading this post, you might find yourself paying closer attention to your coins.
U.S. quarters, dimes, and half dollars teach us something about Gresham’s Law. American Economist, Murray Rothbard, defines this law as types of money with conversion ratios that are specified by legal tender laws, and are therefore different than their market value.
Specifically, when coins contain metal of different value but are given the same legal tender value, the coins made of the cheaper metal remain in circulation as they are continually used as payment. Simultaneously, the coins made of the more expensive metal are taken out of circulation by individuals who hoard the under-valued money.
The fascinating thing about US quarters, dimes, and half dollars that further exemplify Gresham’s Law, is the fact that these coins were made out of 90 percent silver, prior to 1965. (Yes, our coins used to be more than just hunks of metal used as legal tender). Unfortunately for the American people, supply of silver decreased, caused prices of silver to soar, and ultimately caused the U.S. government to take step in.
The U.S. government’s solution was to substitute nickel and copper for the silver that was originally used in our dimes, quarters, and half dollars.
Following the year 1965, coins contained no valuable silver content in them. How did this come to be? Our beloved government substituted silver with nickel and copper, in dimes, quarters, and half dollars, cheating Americans of there once valuable coins.
So what happened to all those silver based coins? People who knew of this substitute, hoarded silver coins and used the new copper-nickel based coins for their everyday transactions. Take a look at your pocket change next time; it is rare to find quarters or dimes minted earlier than 1965. But in case you do find them, congratulations! You have struck gold…I mean silver.
Leo Leksang is an aspiring Econ Student and sophomore at George Mason University. View his post in the 'GMU Undergraduate Contributions' Tab above.