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Good Money Drives Out Bad: A Note On Free Coinage And Gresham'S Law In The Chinese Han Dynasty

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  • Yen-liang Chen
  • Cheng-chung Lai

Abstract

Gresham's law states only one precondition: in the world of metal coins, if there is a fixed rate of exchange between good and bad money, then bad money will drive out good. We argue, however, that when there is no fixed exchange rate between good and bad money, and when the government encourages free coinage, then it is possible for good money to drive out bad. We use these two preconditions to explain why the sizhu coins were successful during the reign of Emperor Wen (179-157 BC) under his free coinage policy. Our analysis of their metal composition and their weights confirms that the sizhu coins minted under a free coinage policy had a better metal content those produced under a central minting policy. This supports our argument that in certain circumstances Gresham's Law will be reversed.

Suggested Citation

  • Yen-liang Chen & Cheng-chung Lai, 2012. "Good Money Drives Out Bad: A Note On Free Coinage And Gresham'S Law In The Chinese Han Dynasty," Economic History of Developing Regions, Taylor & Francis Journals, vol. 27(2), pages 37-46, December.
    • Handle: RePEc:taf:rehdxx:v:27:y:2012:i:2:p:37-46
    DOI: 10.1080/20780389.2012.745660
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    References listed on IDEAS

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    1. Richard Dutu & Ed Nosal & Guillaume Rocheteau, 2005. "The tale of Gresham's law," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    2. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
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