We examine the behavior of money, inflation, and output under fiat and commodity standards to better understand how changes in monetary policy affect economic activity. Using long‐term historical data for 15 countries, we find that, under fiat standards, the growth rates of various monetary aggregates are more highly correlated with inflation and with each other than under commodity standards. Money growth, inflation, and output growth are also higher. In contrast, we do not find that money growth is more highly correlated with output growth under one standard than under the other.

Gresham's law often takes two forms: the rule that bad money drives out good money and a qualified version of that rule that requires a fixed exchange rate between the two monies. Yet history contradicts both of these forms. In fact, the exchange rate has never been fixed, and we doubt it ever could be. We propose a new version of the law that is more feasible and more consistent with the evidence. It requires a fixed transaction cost of using currencies at nonparprices for the rule to apply. Then denomination determines the fate of good money.