So I was reading an article by Nick Szabo called "Shelling Out"

And in his introduction paragraph he explains how American Indians use bones and shells as a currency called "wampum".

This currency was accepted as legal tender in New England between 1637 and 1661. While the Colonies still accepted coin from the British.

He points out that :

The beginning of the end of wampum came when the British started shipping more coin to the Americas, and Europeans started applying their mass-manufacturing techniques.

By 1661, British authorities had thrown in the towel, and decided it would pay in coin of the realm – which being real gold and silver, and its minting audited and branded by the Crown, had even better monetary qualities than shells. In that year wampum ceased to be legal tender in New England.

Now I'm pretty new to economics but I thought Gresham's Law meant that people will not spend valuable assets such as gold or silver instead they will spend less valuable currency for fear of it depreciating.

So did wampum cease to be legal tender because the government "said so" and if so, why would they make this decision?

up vote 1 down vote accepted

A key component of Gresham's Law is that people will spend the less valuable asset such as gold or silver if they legally have the same face value.

Sea shells and beads certainly didn't have the same value or demand within the colonies as British coin. You can't pay for import goods, taxes, or use the company store using beads or shells. Instead the issue that the colonies faced was that the British refused to pay them in coin but rather paid them in goods. If your colony wanted the manufactured British textiles then you would send a shipment of tobacco to receive it. There was an extremely limited supply of British coin in the colonies and so as a result alternatives, such as the wampum which was used by the local Indian tribes had to be adopted.

Eventually the British realized their system wasn't working and began sending over gold and silver coin. These coins were worth more on their face and probably could be considered a less volatile currency and so it was adopted in favor of the wampum which was then phased out of the colonies.

Gresham's law holds that "bad money drives out good money," meaning that given a choice of currencies (broadly speaking, "money" that serves as a store of value and a means of exchange), people use depreciating "bad" money to buy goods and services and hoard "good" money that is appreciating or holding its value.

As this dynamic plays out, eventually there is little "good money" in circulation and the economy suffers accordingly.

I am no expert on wampum, but I believe it had to do with counterfeiting and it just losing its value for the Dutch and English settlers to the extent where nobody wanted it as a form of payment.

New contributor
Daniel is a new contributor to this site. Take care in asking for clarification, commenting, and answering. Check out our Code of Conduct.

Your Answer

 

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.