Inflation and Gresham’s Law in my Lifetime
It was the summer of 1968 and I had just finished seventh grade. Rather than "goofing off" all summer, my dad required me to attend his Principles of Economics class at Grove City College. He and Fred Andre team-taught the class, as my dad was often on the road giving lectures around the country. It was during this class that I learned (among other things) that just four short years earlier, the U.S. government had stopped minting dimes, quarters, and half dollars out of silver (90%)...something about how the money supply had been inflated to the point where it cost more to produce the coins out of silver than their face value. In other words, the silver content was worth more than $.10 for dimes and more than $.25 for quarters. Bottom line: collecting silver coins was a fast way to make some money and a good way to retain value in the long run.
We also learned about Gresham’s Law and how the bad money drives out the good money if a government declares them to be of equal value, which the U.S. government had done. And once I knew what to look for, (dimes, quarters, and half dollars dated prior to 1965) I decided to take my entire savings ($40) and go around to the various stores in town, asking to look through their change drawers and substitute my new sandwich coins for the older silver coins…I even found a classmate to go with me (sorry I don’t remember his name…Jay, maybe?) I was surprised at how many stores actually let me rifle through their change drawers! It only took me a couple of weeks of asking, rifling, and exchanging to have all $40.00 in silver. In short, I beat the banks to the punch…(I had heard that they were gradually removing the silver coins and melting them down…don’t know whether that was true or not).
I also started offering $.15 for silver dimes and $.30 for silver quarters to my classmates the following school year in eighth grade. I remember one fellow in particular came up with all kinds of old coins…to this day I wonder where he found them.
While I never doubted that the price for those silver dimes, quarters, and halves would go up, I never dreamed that by 2013, it would cost me $5.00 to buy one of those pre-1965 quarters!
Years later (1982), I heard that the U.S. Mint was changing the U.S. penny so that it would no longer be made out of copper, but instead, its time had come to also become a sandwich coin (with a copper coating). Consequently, I started collecting pennies! I knew what was happening…Gresham’s Law was at work again! And not long ago, I had a coin dealer tell me that he was paying $.03 for the old wheat pennies (1909 – 1956). Of course, many of them are worth much more than that to collectors. So, to this day, I sort through my pennies at the end of each day and put my pre-1982 pennies in one jar and my 1982 and newer coins in another jar. Who knows, perhaps some day it will cost $5.00 to buy a pre-1982 penny???
And now, we have the same phenomenon occurring with U.S. nickels. According to Wikipedia, “As of 2013, it costs more than eleven cents to produce a nickel; the Mint is exploring the possibility of reducing cost by using less expensive metals.” Ever cheaper substitutes are needed just to be able to make change…at some point, we won’t need change, and the dollar will become the lowest denomination used to purchase things. By then, coins will be worth more than the paper dollar!
While I only remember the driving out of silver, copper, and nickel, let’s not forget that the United States Federal Reserve Bank drove out gold (which was used as money until 1933) before that. The bottom line is that, over time, inflation, along with Gresham’s Law and legal tender laws, has driven out the good money and substituted bad money in its place. I guess some things haven’t changed since I was in seventh grade, but some things have.
Robert F. Sennholz
To better understand what the U.S. government is doing to our money, check out Age of Inflation, Money and Freedom, and A Beginner’s Buying Guide to Gold and Silver.