Gresham's Law, Vietnamese Dong and the Gold
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LONDON (BullionVault) -
Governments are often tempted to live beyond their means. Today, that means national debts and quantitative easing. But a few hundred years ago, it meant debasing coinage.
Silver and gold coins would be 'clipped' - with a tiny quantity of their metal shaved off the edge every time they passed through government hands - or they would be minted with a lower precious metal content than their face value stated. This would enable the monetary authorities to produce more coins for the same amount of bullion, increasing the government's spending power in the marketplace.
The net result was that coins with identical face values did not necessarily hold the same commodity value. And this often led to a rather interesting phenomenon. When people knew there were both 'good' and 'bad' coins floating around, they tended to spend the bad and hang onto the good. Before long, all the good money disappeared into hoards. The only money in circulation was bad money.
This is known as Gresham's Law, named after the sixteenth century financier Sir Thomas Gresham. In its most simple form, Gresham's Law is often stated as "bad money drives out good money", and it's no mere historical curiosity. Gresham's Law is alive and kicking today, nowhere more than in Vietnam.
Vietnam's economy uses three different forms of money today. There is the official currency, the Vietnamese Dong. There is also the US Dollar, which Vietnamese people tend to trust a bit more. And then, there is gold.
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