Tuesday, August 12, 2008

Sri Lanka Sees Gresham's Law Come Alive

Sri Lanka is melting its coinage and minting less valuable coins amidst booming commodity prices and rising inflation at home, continuing a tradition of monetary debasement that dates back to ancient monarchies. Central Bank Governor Nivard Cabraal says the monetary authority is cutting the cost of the coin issue by melting existing coins and re-striking new and lightweight ones.

By collecting the Nickel/brass and Cupro/Nickel coins in circulation and shipping them to the minter for melting and re-striking, Sri Lanka could now debase the coins with less valuable plated steel coins. Debasing coins has been a traditional tactic of monarchs to steal from the population secretly, before the advent of paper money central banking gave rulers an even better weapon to create inflation and impoverish the population.

The process has been formalized in monetary economics famously as Gresham's Law, named after Sir Thomas Gresham who advised Queen Elizabeth I in 1558 about the bad effects of debasing coins.


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