Understanding Early Monetary Developments by Applying Economic Laws: The Monetary Approach to the Balance of Payments, Gresham's and Thiers' Laws

14 Pages Posted: 7 Apr 2011

See all articles by Peter Bernholz

Peter Bernholz

University of Basel - Center of Economics and Business Administration (WWZ)

Date Written: March 31, 2011

Abstract

The present paper demonstrates that certain early monetary developments observed in the West since the Peloponnesian War about 400 B.C., but also in China can only e explained with the help of three economic theories called "Gresham's Law”, “Thiers' Law” and “The Monetary Approach to the Balance of Payments”. By doing so it is shown that “economic laws” have not only been working for hundreds of years, but also that several observed phenomena can only be explained by applying them. Gresham's Law states that, given fixed exchange rates among two kinds of money, bad money will drive out good money. By contrast, Thiers' Law (a name coined by me, in the literature it is also called the Anti-Gresham Law) states that with flexible exchange rates and sufficiently significant differences in the rates of inflation of two currencies good money will drive out the bad one. Because of this an undervaluation of the more inflating currency develops, its purchasing power is lower abroad than at home. Finally the Monetary Approach to the Balance of Payments starts by looking at the balance of payments - and for Antiquity we should rather restrict this to the balance of trade - by taking into account that surpluses or deficits of the balance of payment have to be financed by extending credit or monetary flows, for otherwise they cannot occur. Since international credits can be neglected in classical times, this means that deficits of the balance of trade have to be financed by an outflow of coins or sometimes gold, silver or copper. The empirical evidence for the working of these laws quoted stretches from antiquity to modern times.

Suggested Citation

Bernholz, Peter, Understanding Early Monetary Developments by Applying Economic Laws: The Monetary Approach to the Balance of Payments, Gresham's and Thiers' Laws (March 31, 2011). Available at SSRN: https://ssrn.com/abstract=1799983 or http://dx.doi.org/10.2139/ssrn.1799983

Peter Bernholz (Contact Author)

University of Basel - Center of Economics and Business Administration (WWZ) ( email )

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