Drury’s Law

If you are a member of Enterprise Britain (one of four million business owners/managers/workers) prepare yourself for a major event. You are about to receive a new Economic Law with the modest title Drury’s Law.

Before the drum rolls and trumpets and perhaps a little ‘Land of Hope and Glory’ I must acknowledge Sir Tom Gresham whose idea I am pinching.

Sir Thomas (1519-1579), an English financier in Tudor times, created Gresham’s Law which said that “bad money drives out good money”. The terms ‘bad’ and ‘good’ referred to exchange values imposed by legal-tender legislation.

If money was debased by governments issuing coinage containing alloys instead of the full amount of the base metal, by individuals cutting off some of the metal or the circulation of counterfeit coins, this bad money dominated coins in circulation because ‘good money’ was hoarded or melted down to be sold for its higher bullion value.

Sir Tom would have considered all modern money as ‘bad money’ because no current coinage is redeemable for any kind of valuable commodity. Its legitimacy depends on government guarantee.

Right, now the drums and trumpets….

Drury’s Law says that ‘bad deals’ drive out ‘good deals’.

This Law applies to the catastrophic conditions in the smaller company share markets where the Alternative Investment Market (‘AIM’) and PLUS-quoted (formerly known as Ofex) have virtually dried up as sources of risk finance for Britain’s Enterprising Businesses.

Over the last few years market professionals have enjoyed a gravy train as they have poured doubtful companies onto AIM and PLUS-quoted thereby earning huge fees. All the time many of the good transactions were hidden as the Advisers concentrated on the easy money.

Drury’s Law has applied to the last two/three years as the bull market reached its peak. As a result investors have been selling out of stocks they discovered were overvalued and of poor quality. The markets have dried up and there is virtually no new equity finance for enterprising businesses.

Like Drury’s Law, Gresham’s Law was not totally original. In 405bc Aristophanes wrote in ‘The Frogs’:

“The course our city runs is the same towards men and money….So with men we know for upright, blameless lives and noble names. These we spurn for men of brass.”

What! Bad politicians drive out good politicians.

Let’s stay with finance for enterprising businesses.

More next time.

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