Thoughts About People, Organizations and Gresham's Law

Gresham’s Law, an iron law known to all students of economics has been around for centuries. Briefly stated, it can be explained as follows, namely “bad money drives out good money”. This was demonstrated in the late 1960s in the United States as coinage was changed from silver to “sandwich” coins of little intrinsic value. Until 1964, the dime, quarter, half dollar and silver dollar were 90% silver in their composition. Paper money, too, circulated in various forms including silver certificates, United States notes and Federal Reserve notes. In 1964, the price of silver increased dramatically to a point where each silver coin contained more silver than its face value. That made it worthwhile to melt the silver coins for their silver content which was greater than the coin’s value in commerce. The Treasury Department, through the Mint, determined that due to the rise in value of silver, it could no longer mint silver coins at a profit (seignorage). Legislation demonetized silver and the “sandwich” bimetallic coins were minted starting in 1965. Within the next several years, all of the silver coins which were circulating in the United States magically disappeared. Hoarders collected millions of these coins, now worth considerably more than face value and they were sold to smelters who melted them down to pure silver which was then sold at a good profit. Collectors still have millions of these coins in collections and advertisements for these coins can be found in any numismatic publication. Additionally, silver certificates were phased out as they were redeemable at the treasury for silver coins. To sum up, in 1965, a silver quarter may have been worth double its face value while the sandwich coin had a commercial value of twenty-five cents but a metallic value of a penny. It is easy to conclude what a rational person would do under the circumstances. Hoarding the valuable coin and passing into circulation the new coin of nominal value. This scenario occurred contemporaneously throughout the world as silver coins disappeared.

Gresham’s Law is an economic law and is based on rational behavior. It, however, can be applied to personnel policies in very large organizations where to a very great extent individual effort and value are poorly recognized or not recognized at all. A firm with a large number of employees, or even a moderate number, may offer an annual pay increase to employees of a similar job classification of three percent. This increase will accrue to all in that category regardless of individual effort and ability. While most would think this type of annual reward is just and fair, it is not. It will arouse resentment, silent or vocal by the employees who are performing at a higher level and achieve, despite their efforts, no particular recognition. The rational person, known as homo economics will realize that he/she has little future in such an organization and will search for a better paying job. It may be true that an employee within one or two years of retirement may swallow the unfair treatment that he/she perceives as it is inconvenient to change jobs at the end of one’s career. However, the strong will do what they can and the weak will suffer what they must. Standardization of pay and benefits is now widespread in industry and commerce. Labor unions, considerably weakened at this time in comparison to the 1970s bargained very strongly for across the board pay raises. Management saw the wisdom of this type of annual reward and it can be found throughout industry and commerce and government as well. The result is the nurturing and growth of mediocrity, the destruction of initiative and widespread dissatisfaction among employees and consumers alike. Labor unions were an important part of American economic development in protecting the weak and providing for a balance between the power of the employer and the powerlessness of the employee. Salaries, as well as working conditions improved tremendously. One need only read The Jungle by Upton Sinclair to see what kind of labor conditions existed early in the twentieth century. Labor history is replete with violent battles between employers and unions from the coal fields of West Virginia and Kentucky to the auto plants of Detroit. The result was a living wage, vacations, pension plans and entry into the middle class.

Today, these are no longer issues. What is the issue is over regimentation of the work force and the inability of management to be creative and deviate from musty policy and procedure manuals which have attained near sacred status. Labor is not exempt from criticism as the formerly weak are no longer weak and do not require the protection and defense that they once needed. Individual effort not only should be recognized but should be promoted and appropriate rewards should be available.

Capable employees recognize that a uniform across the board pay raise is not as just as it appears. Organizations that do not reward the capable, productive and creative employee should wake up and recognize that in our mobile society, these workers will look for another, better job and leave. Truly, bad workers drive out good, with resulting deterioration of the product and the workplace. 

Garry S. Sklar

Las Vegas, Nevada

June 5, 2020