New York’s First Encounter with Gresham’s Law

“American history is peculiarly well-suited to throw light on the nature and development of money.” – Paul A. Samuelson

The United States’ greatest economic disaster, the Great Depression, was caused by mismanagement of the money. Such money mischief was not a new phenomenon for the country. The Great Depression was one episode in a long line going back to well before the colonies became states.

In the 1630s and 1640s, Willem Kieft helped usher in one of the first cases of monetary mismanagement in the new colonies of North America. As the director of New Netherland (now New York), Kieft recognized a shortage of gold and silver coin within the colony. He made wampum, a polished shell bead, into legal tender to help remedy the problem.

Wampum was used to pay the New Netherland Company’s employees and debts, as well as being used in trade with the local Native American tribes, which was vital to the survival of the colony. Kieft was the first director to understand the power and importance of wampum.

However, recognizing the importance of money is not the same thing as knowing how to manage it. In an attempt to stabilize the value of wampum within the colony, Kieft fixed the exchange rate between wampum beads and the Dutch currency at four white beads per Dutch stiver.

At the same time, he sent people to sweep the shores of Long Island to get more beads for the company. The colony tried to “mine” its way to riches and was successful for a few years. With Dutch steel tools, it was able to produce wampum at an incredible rate. However, these newly found beads were often of a much lower quality. They were often unpolished or cracked.

By 1641, New Netherlands had fixed exchange rates, an increasing supply of money, and different qualities of money. Conditions were perfect for Gresham’s law, that bad money drives out good money, to take hold. The colonists of New Netherlands were stuck with trading only in bad-quality wampum. The official record states:

Very bad wampum is at present circulating here and payments made in nothing but rough unpolished stuff which is brought hither from other places, where it is 50 percent cheaper than it is paid out here, and the good, polished wampum, commonly called Manhattan Wampum is wholly put out of sight or exported, which tends to the express ruin and destruction of this Country.

In an attempt to fix the problem, the company outlawed low-quality wampum:

We do, therefore, for the public good Interdict and Forbid all persons … to receive in payment or to pay out any unpolished wampum during the next month of May, except that at Five for one Stiver, and that strung, and then after that, Six beads for one Stiver.

However, the new ordinance proved ineffective. The good wampum still fled the colony, creating a massive shortage of good currency for local trade. And as Arthur Parker described the situation, the “sudden influx of cheap money precipitated a rapid depreciation of wampum that produced a panic far more serious to the budding colonies than the much-discussed panic of 1908.”