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Gresham’s Law and its present-day manifestations

In the 16th Century, coinage system was widely in use in Britain. The Government of the day soon realised that it was costing it more to mint the coins than the very face value thereof. Consequently, it introduced debased coins (coins with lesser gold content), in the economy. This led to the practice, on the part of the public, of hoarding gold coins (good money) while, on the other hand, letting the debased coins (bad money), circulate freely in the market.

Noticing the phenomenon, Sir Thomas Gresham, an English merchant and financier, who served as financial advisor to both King Edward IV and Queen Elizabeth I of England, during the 16th Century, articulated the basic economic principle that “bad money drives good money out of circulation”. The Queen tried to lessen the adverse impact of using debased coins in circulation by issuing new legalised coins, but people would continue holding on to the new coins, due to their higher value, by passing the old debased ones on, for circulation, proving the veracity of Gresham’s principle.

Gresham’s Law with respect to its implications, on the currencies of our times, may be taken as having become obsolete; but an analogy can be deduced from it that may still be very much applicable to the societal norms of our times. A parallel could be drawn between the concept used by Gresham for currency and the happenings in a number of fields, within our society. Suitable examples could be cited, in this context, by referring to the public sector organisations and media, to name only a few.

Our country has no dearth of cases, where such major public sector organisations can be named, which faced a complete collapse because “when incompetent and dishonest executives were entrusted with the decision making process, competent and worthy resources were driven out of the organisation”. We have consistently failed to appreciate the negative impact of bad leadership over some of our finest organisations, which were led to close shop. Others are likely to follow suit, should we pursue a similar policy in the times to come.

The manifestations of this law, in the field of management science, are clearly noticeable when the sincere and honest efforts of an able leadership, invested in bringing about concrete and tangible results, are thwarted by those, who rely on shortcuts for rising up to the top management positions by employing all kinds of tricks and manipulations. The ethos, resulting from such unethical pursuits, on the subordinates and lower management entice them to follow suit, leaving the concerned organisation in a state of complete anarchy and chaos.

Over the years, our political parties have also become a victim of this law. Our ruling class mainly comprises of the elite and the feudal, while representation of the middle and higher middle class, among the ruling politicians, is almost non-existent despite the overwhelming majority of the populace belonging to the latter segment. Political parties, in Pakistan, usually allot their election tickets to those candidates who are deemed to be “electable”. The deserving and capable candidates, on account of belonging to the lower classes of society, are not even given enough chances to rise in the party hierarchy itself. Consequently, the common man seems to have lost all interest in our prevailing political system which has led him to be totally driven out of the system. A sincere appreciation of this crucial factor must be recognised by our newly rising political parties, when allotting election tickets in the upcoming elections, which must take merit of each contender into account.

A fair understanding of the application of Gresham’s Law to the behavioural pattern of our society, irrespective of the various fields affected by it, well supplemented by numerous examples that one may find suitable to quote in this regard, we may be convinced in concluding that essentially what is required by us to achieve success and progress, can only be achieved if honesty and merit-based leadership is inducted at all levels, in all vocations, fields and enterprises, be it public or private sector organisations, or our political parties.

(The writer is a Chartered Accountant and CEO of AKD Securities)

Muhammad Fareed Alam, "Gresham’s Law and its present-day manifestations," Business recorder. 2013-03-27.