Mint Parity Theory

Equivalence Theory of Coinage

Introduction

The Equivalence Theory of Coinage (ETC) is a popular economic and finance theory which suggests that the value of a currency should be equal to the amount of goods or services which it can exchange in a given economy. This theory is based on the idea that different countries have different currencies, but that a person should be able to exchange coins for goods or services in a way that results in a value which is equivalent to the value of the coins which he or she has.

History

The Equivalence Theory of Coinage was first proposed by economist and social theorist David Ricardo in the middle of the 19th century. Ricardo argued that it was the responsibility of governments to set the value of their currencies relative to other currencies in order to ensure that their citizens would be able to exchange their coins for goods and services in foreign countries based on the true value of their money. This idea was then adopted by other economists such as John Stuart Mill and Thomas Malthus who further developed the theory in their writings.

Practical Applications

The theory of ETC is an important concept in the modern world of international trade, since it helps to ensure that the currencies of different countries can be exchanged at a fair and equal rate. In particular, the theory helps to prevent the possibility of one country exploiting another by overvaluing or undervaluing its own currency. Furthermore, it has long been suggested that a situation in which the value of a currency is not equal to its worth in terms of the goods or services it can purchase could lead to inflation and other economic instabilities.

Conclusion

The Equivalence Theory of Coinage is an important economic theory which is used to ensure that currencies of different countries have an equal exchange rate. This theory is based on the idea that countries should set the value of their money relative to each other’s currencies in order to ensure a fair and equitable exchange rate. Moreover, it is believed that if currencies are not exchanged based on their true value, it could lead to economic instabilities such as inflation. Therefore, the Equivalence Theory of Coinage is seen as an important concept in the modern world of international trade.

Gresham’s law of equivalent currency, also known as Gresham’s law of pricing, is a fundamental economic principle introduced by Thomas Gresham. In its most basic form, Gresham’s law states that “bad money drives out good money”. By “bad money” we mean currency with a weaker intrinsic value in comparison to other forms of money, while “good money” refers to currency with a higher intrinsic value when compared to alternatives.

The theory states that when two forms of money have different intrinsic values, people will choose to spend the lower-valued currency instead of the higher-valued currency with which it is mixed. This is because, as a rule, people are naturally inclined to ensure that their money gets the greatest return for their value.

For example, when there are 10 coins in circulation - five gold coins valued at 10 dollars each and five silver coins valued at five dollars each - Gresham’s law states that people will tend to spend the silver coins first. This is because the silver coins have a lower value, and it is more valuable to spend them first in order to get the same face value that the gold coins hold. This reduces the demand for gold coins, as people are more inclined to spend the silver coins than to use them to receive ten dollars in goods and services.

In summary, Gresham’s law of equivalent currency states that when there are two forms of money in circulation, people will generally choose to spend the one with the lower intrinsic value instead of the one with the higher intrinsic value. This law has been used to explain various economic phenomena and has been used in economic policy-making since the 19th century.