Macro-Finance Salon (No.103): Gresham’s Law in Action in the History of Chinese Currency

2018-10-20 IMI

October 15, 2018 at 10 am, the “Macro-Finance Salon”(103rd session) and the “numismatic society academic seminar”(4th session) were held in classroom 0202 of the Mingde Law Building in Renmin University. These sessions focused on “Gresham’s Law in Action in the History of Chinese Currency”, chaired by Professor He Ping of the Department of Monetary Finance from Renmin University’s School of Finance. The featured guest speaker is Dr. Cheng-Chung Lai, professor emeritus of National Tsinghua University (Taipei). Professor Lai received his doctorate in social economic history from Ecoles des Hautes Etudes en Sciences Sociales, Paris, and was a visiting scholar in Harvard-Yenching Institute. Professor Lai has long taught in the Department of Economics in National Tsinghua University, his research interest is in economic history, and the history of economic thought. His published works include acclaimed bestsellers such as Northern Border Defense and Sate Financial Crisis in Mid-Ming Dynasty, The Crown and the Merchants: Sir Thomas Gresham and Foreign Debt Financing of the Tudors, The Taste of Economic History, and The Taste of Economic Thought History. This academic seminar is jointly organized by the Remin University’s School of Finance, China Numismatic Society, and the International Monetary Institute. First, Prof. He introduced and welcomed Pro.Lai. Next, Prof. He introduced the theme of the seminar to the attending scholars. The seminar was attended by a delegation led by Mr. Zhou Weirong, who is the Deputy secretary general of the China Numismatic Society and the curator of the China Numismatic Museum. Other members from the delegation include Mr. Gao Congming, chief editor of China Numismatics; Mr. Yang Jun, Director of the Secretariat of the China Numismatic Society; Mr. Wang Ji Jie, Director of Communications form the China Numismatic Society. Mr. Song Xiaodong, deputy director of the People’s Bank of China’s Bureau of Currency, Gold and Silver, also led a delegation of government representatives. Professor Qu Qiang, director of Renmin University’s Financial Policy Research Center; Profesor Tu Yonghong, deputy director of the IMI; Professor Wang Yu, lead researcher from the School of Finance; Professor Liu Wenpeng, deputy director of the Institute of Qing History also attended the academic seminar. Also attending are the undergraduate and graduate students from the School of Finance. Dr. Lai’s talk was based on his work in The Crown and the Merchant: Sir Gresham and Foreign Debt Financing of the Tudors. His keynote is divided into six sections. First, Dr. Lai introduced the Gresham family and their family business. The Greshams served three Tudor crowns starting from King Henry VIII, their relationship with the crown was a typical union between power and wealth. Between King Henry VIII and Queen Elizabeth, the British fought wars with the French, the Spanish, and the Irish. Consequently, the royal treasury was heavily in debt, funds were secured via negotiations with mainland Europe by royal commissioned merchants. The Greshams were such a family of merchants. In exchange for services rendered, they were rewarded with titles, fief, and the right to international trade. As a powerful merchant house, the Gresham family requires more trust from the royal family to find more profits. Second, Dr. Lai gave a brief introduction to the Tudors. After King Henry VIII’s death, the crown was passed to King Edward VI. At the time of coronation, Edward VI was only 9, and holds few real powers. The crown was next passed to Queen Mary, daughter of Henry VII, her tyrannical rule gave her the nickname “Bloody Mary”. Queen Mary’s short reign ended with her death 5 years after taking the crown, and the throne was succeeded by Queen Elizabeth, under whom England gradually seized prominence as a super power. Third, Dr. Lai talked about mercantilism and the Gresham family. During the 44 year rule of Queen Elizabeth I, England started to rapidly develop its navy, and intelligence agencies. At the start of the Elizabethan era, the economy was behind, and England was weak. To address this issue, the crown commissioned the privateers, who were essentially sanctioned pirates who would plunder the Spanish and Portuguese ships and share their profits with the British Royal treasury. In exchange for their services, the Queen would give them titles. Mercantilism was born during this era. The Greshams were trusted by one of Queen Elizabeth’s close confidants, and through this confidant, the Greshams also gained the trust of the Queen. Fourth, Dr. Lai talked about the law of “Bad money drives out good” and money “sweating”. At the Elizabethan era, the government had regulation only for the face value of currency, and did not specify a set weight for coins. Thus, people had the tendency to keep new coins in their pockets, or purposefully eroding old coins with chemicals to give it a fresh look (money sweating). As time pass, all that is in circulation would be old and degraded currency, because everyone would horde brand new currency. Although two coins might hold the same face value, horded coins possess greater real value. Gresham’s law of “Bad money drives out good” was born to describe such a historical phenomenon. It’s worth mentioning that although termed “Gresham’s law, this idea had nothing to do with Gresham, the term was only “coined” this way because Gresham was the most famous money exchanger at the time. Fifth, Dr. Lai talked about how historically, China also had the opposite instance of “good money drives out bad”. During the early Han Dynasty, the government allowed privatized smiths to caste coins, with the quality that the coins minted must not be lower than official minted coins. Because of the varied coin sources of this time, people preferred coins with a higher copper content, which would in turn give private mints the incentive to mint better quality coins. Money supply increased, coin quality was good, prices rise, the economy was strong. Of course, in history, such instances are rare, and the Han Dynasty achieved this only by allowing private mints to function. Sixth was a discussion on Gresham’s law. Gresham’s law’s essence is that when coins with different intrinsic values are used to denote the same purchase value, circulation will prioritize low quality currency, while saving “good money” for storage. Professor Lai’s keynote sparked enthusiastic discussion among the attendees. Discussions included metal composition of the Chinese currency, circulation of different types of currency (metal, credit, domestic, and foreign currency), and currency functions. Gresham’s law is discussed from multiple dimensions, and its interpretation and implications are also discussed. Participants also talked about numerous instances form Chinese currency history. Student attendees also participated, asking questions related to Gresham’s law’s importance in today’s society, the Bitcoin and its effect on national coin security. Experts of various field joined in the discussion and gave their responses to these questions. Lastly, Prof. He Ping made the closing remarks. First, Mr. Zhang Wuchang and Mr. Zhou Qiren’s concern about objectivity may be addressed by the introduction of a threshold. Second, Gresham’s law addresses a possible outcome when currency of differing intrinsic value is placed into circulation at the same time, and not a discussion of standard currency, currency equilibrium or currency quality across different time periods. Third, today, credit is used as a form of international currency, as such using purchasing power to compare sovereign currencies will inevitably lead to “good currency driving out bad”. Which marked the end of another successful academic seminar.

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Macro-Finance Salon (No.103): Gresham’s Law in Action in the History of Chinese Currency

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