In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of
commodity money
Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods.
This is in contrast to representati ...
in circulation, which are accepted by law as having similar
face value, the more valuable commodity will gradually disappear from circulation.
The law was named in 1860 by economist
Henry Dunning Macleod
Henry Dunning Macleod (31 March 1821 – 16 July 1902) was a Scottish economist.
Life
Henry Dunning Macleod was born in Edinburgh, and educated at Eton, Edinburgh University, and Trinity College, Cambridge, where he graduated in 1843. Macleod ...
after Sir
Thomas Gresham
Sir Thomas Gresham the Elder (; c. 151921 November 1579), was an English merchant and financier who acted on behalf of King Edward VI (1547–1553) and Edward's half-sisters, queens Mary I (1553–1558) and Elizabeth I (1558–1603). In 1565 G ...
(1519–1579), an English
financier
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
during the
Tudor dynasty
The House of Tudor was a royal house of largely Welsh and English origin that held the English throne from 1485 to 1603. They descended from the Tudors of Penmynydd and Catherine of France. Tudor monarchs ruled the Kingdom of England and it ...
. Gresham had urged Queen Elizabeth to restore confidence in then-debased English currency. The concept was thoroughly defined in medieval Europe by
Nicolaus Copernicus
Nicolaus Copernicus (; pl, Mikołaj Kopernik; gml, Niklas Koppernigk, german: Nikolaus Kopernikus; 19 February 1473 – 24 May 1543) was a Renaissance polymath, active as a mathematician, astronomer, and Catholic Church, Catholic cano ...
and known centuries earlier in classical Antiquity, the Middle East and China.
"Good money" and "bad money"
Under Gresham's Law, "good money" is money that shows little difference between its nominal value (the face value of the coin) and its
commodity value (the value of the metal of which it is made, often
precious metal
Precious metals are rare, naturally occurring metallic chemical elements of high economic value.
Chemically, the precious metals tend to be less reactive than most elements (see noble metal). They are usually ductile and have a high lustre. ...
s,
nickel
Nickel is a chemical element with symbol Ni and atomic number 28. It is a silvery-white lustrous metal with a slight golden tinge. Nickel is a hard and ductile transition metal. Pure nickel is chemically reactive but large pieces are slow to ...
, or
copper
Copper is a chemical element with the symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pinkis ...
).
In the absence of
legal-tender laws, metal coin money will freely exchange at somewhat above
bullion
Bullion is non-ferrous metal that has been refined to a high standard of elemental purity. The term is ordinarily applied to bulk metal used in the production of coins and especially to precious metals such as gold and silver. It comes from t ...
market value. This may be observed in
bullion coin
Bullion is non-ferrous metal that has been refined to a high standard of elemental purity. The term is ordinarily applied to bulk metal used in the production of coins and especially to precious metals such as gold and silver. It comes fro ...
s such as the
Canadian Gold Maple Leaf
The Canadian Gold Maple Leaf (GML) is a gold bullion coin that is issued annually by the Government of Canada. It is produced by the Royal Canadian Mint.
The Gold Maple Leaf is legal tender with a face value of 50 Canadian dollars. The market ...
, the
South Africa
South Africa, officially the Republic of South Africa (RSA), is the southernmost country in Africa. It is bounded to the south by of coastline that stretch along the South Atlantic and Indian Oceans; to the north by the neighbouring countri ...
n
Krugerrand
The Krugerrand (; ) is a South African coin, first minted on 3 July 1967 to help market South African gold and produced by Rand Refinery and the South African Mint. The name is a compound of ''Paul Kruger'', the former President of the South A ...
, the
American Gold Eagle
The American Gold Eagle is an official gold bullion coin of the United States. Authorized under the Gold Bullion Coin Act of 1985, it was first released by the United States Mint in 1986. Because the term "eagle" also is the official United S ...
, or even the
silver
Silver is a chemical element with the Symbol (chemistry), symbol Ag (from the Latin ', derived from the Proto-Indo-European wikt:Reconstruction:Proto-Indo-European/h₂erǵ-, ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, whi ...
Maria Theresa thaler (
Austria
Austria, , bar, Östareich officially the Republic of Austria, is a country in the southern part of Central Europe, lying in the Eastern Alps. It is a federation of nine states, one of which is the capital, Vienna, the most populous ...
) and the
Libertad (
Mexico
Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
). Coins of this type are of a known purity and are in a convenient form to handle. People prefer trading in coins rather than in anonymous hunks of precious metal, so they attribute more value to coins of equal weight.
The
price spread
Markup (or price spread) is the difference between the selling price of a good or service and cost. It is often expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order ...
between
face value and commodity value when it is minted is called
seigniorage
Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
. As some coins do not circulate, remaining in the possession of
coin collectors
Coin collecting is the collecting of coins or other forms of minted legal tender.
Coins of interest to collectors often include those that were in circulation for only a brief time, coins with mint errors, and especially beautiful or historic ...
, this can increase demand for coinage.
On the other hand, "bad money" is money that has a commodity value considerably lower than its face value and is in circulation along with good money, where both forms are required to be accepted at equal value as legal tender.
In Gresham's day, bad money included any
coin
A coin is a small, flat (usually depending on the country or value), round piece of metal or plastic used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order t ...
that had been debased.
Debasement
A debasement of coinage is the practice of lowering the intrinsic value of coins, especially when used in connection with commodity money, such as gold or silver coins. A coin is said to be debased if the quantity of gold, silver, copper or nick ...
was often done by the issuing body, where less than the officially specified amount of precious metal was contained in an issue of coinage, usually by
alloy
An alloy is a mixture of chemical elements of which at least one is a metal. Unlike chemical compounds with metallic bases, an alloy will retain all the properties of a metal in the resulting material, such as electrical conductivity, ductility, ...
ing it with a
base metal
A base metal is a common and inexpensive metal, as opposed to a precious metal such as gold or silver. In numismatics, coins often derived their value from the precious metal content; however, base metals have also been used in coins in the past ...
. The public could also debase coins, usually by
clipping
Clipping may refer to:
Words
* Clipping (morphology), the formation of a new word by shortening it, e.g. "ad" from "advertisement"
* Clipping (phonetics), shortening the articulation of a speech sound, usually a vowel
* Clipping (publications) ...
or scraping off small portions of the precious metal, also known as "stemming" (
reeded edges on coins were intended to make clipping evident). Other examples of bad money include
counterfeit
To counterfeit means to imitate something authentic, with the intent to steal, destroy, or replace the original, for use in illegal transactions, or otherwise to deceive individuals into believing that the fake is of equal or greater value tha ...
coins made from base metal. Today virtually all circulating coins are made from base metals, known as
fiat money
Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
. While virtually all contemporary coinage is composed solely of base metals, during certain contemporary, 21st century years in which copper values were relatively high, at least one common coin (the U.S. nickel) still maintained "good money" status (largely depending on market rates).
In the case of clipped, scraped, or counterfeit coins, the commodity value was reduced by fraud, as the face value remains at the previous higher level. On the other hand, with a coinage debased by a government issuer, the commodity value of the coinage was often reduced quite openly, while the face value of the debased coins was held at the higher level by legal tender laws.
The old saying "a bad penny always turns up" is a colloquial recognition of Gresham's Law.
Examples
Silver coins were widely circulated in
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
(until 1968) and in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
(until 1964 for
dimes
DIMES (Distributed Internet Measurements & Simulations) was a subproject of the EVERGROW Integrated Project in the EU Information Society Technologies, Future and Emerging Technologies programme. It studied the structure and topology of the Inter ...
and
quarters and 1970 for
half-dollars) when the
Coinage Act of 1965
The Coinage Act of 1965, , eliminated silver from the circulating United States dime (ten-cent piece) and quarter dollar coins. It also reduced the silver content of the half dollar from 90 percent to 40 percent; silver in the half dollar was s ...
was passed. These countries
debased their coins by switching to cheaper metals, thereby inflating the new debased currency in relation to the supply of the former silver coins. The silver coins disappeared from circulation as citizens retained them both for their collector value and to capture the steady current and future intrinsic value of the metal content over the newly inflated and therefore devalued coins, using the newer coins in daily transactions.
The same process occurs today with the copper content of coins such as the pre-1997
Canadian penny, the pre-1982
United States penny and the pre-1992 UK bronze pennies and two pence. This also occurred even with coins made of less expensive metals such as
steel
Steel is an alloy made up of iron with added carbon to improve its strength and fracture resistance compared to other forms of iron. Many other elements may be present or added. Stainless steels that are corrosion- and oxidation-resistant ty ...
in India.
Theory
The law states that any circulating currency consisting of both "good" and "bad" money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the "bad" money. This is because people spending money will hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for themselves.
Legal tender laws act as a form of price control. In such a case, the intrinsically less valuable money is preferred in exchange, because people prefer to save the intrinsically more valuable money.
Consider a customer purchasing an item which costs five
pence
A penny is a coin ( pennies) or a unit of currency (pl. pence) in various countries. Borrowed from the Carolingian denarius (hence its former abbreviation d.), it is usually the smallest denomination within a currency system. Presently, it is th ...
, who possesses several silver
sixpence coins. Some of these coins are more debased, while others are less so – but legally, they are all mandated to be of equal value. The customer would prefer to retain the better coins, and so offers the shopkeeper the most debased one. In turn, the shopkeeper must give one penny in change, and has every reason to give the most debased penny. Thus, the coins that circulate in the transaction will tend to be of the most debased sort available to the parties.
If "good" coins have a face value below that of their metallic content, individuals may be motivated to melt them down and sell the metal for its higher intrinsic value, even if such destruction is illegal. As an example, consider the 1965
United States half-dollar coins, which contained 40% silver. In previous years, these coins were 90% silver. With the release of the 1965 half-dollar, which was legally required to be accepted at the same value as the earlier 90% halves, the older 90% silver coinage quickly disappeared from circulation, while the newer debased coins remained in use. As the value of the dollar (Federal Reserve notes) continued to decline, resulting in the value of the silver content exceeding the face value of the coins, many of the older half dollars were melted down or removed from circulation and into private collections and hoards. Beginning in 1971, the U.S. government abandoned including any silver in half dollars, as the metal value of the 40% silver coins began to exceed their face value, which resulted in a repeat of the previous event, as the 40% silver coins also began to vanish from circulation and into coin hoards.
A similar situation occurred in 2007, in the United States with the rising price of
copper
Copper is a chemical element with the symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pinkis ...
,
zinc
Zinc is a chemical element with the symbol Zn and atomic number 30. Zinc is a slightly brittle metal at room temperature and has a shiny-greyish appearance when oxidation is removed. It is the first element in group 12 (IIB) of the periodi ...
, and
nickel
Nickel is a chemical element with symbol Ni and atomic number 28. It is a silvery-white lustrous metal with a slight golden tinge. Nickel is a hard and ductile transition metal. Pure nickel is chemically reactive but large pieces are slow to ...
, which led the U.S. government to ban the melting or mass exportation of
one-cent and
five-cent coins.
In addition to being melted down for its bullion value, money that is considered to be "good" tends to leave an economy through international trade. International traders are not bound by legal tender laws as citizens of the issuing country are, so they will offer higher value for good coins than bad ones. The good coins may leave their country of origin to become part of international trade, escaping that country's legal tender laws and leaving the "bad" money behind. This occurred in Britain during the period of the
gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
.
History of the concept
Gresham was not the first to state the law which took his name. The phenomenon had been noted by
Aristophanes
Aristophanes (; grc, Ἀριστοφάνης, ; c. 446 – c. 386 BC), son of Philippus, of the deme
In Ancient Greece, a deme or ( grc, δῆμος, plural: demoi, δημοι) was a suburb or a subdivision of Athens and other city-states ...
in his play ''
The Frogs
''The Frogs'' ( grc-gre, Βάτραχοι, Bátrakhoi, Frogs; la, Ranae, often abbreviated ''Ran.'' or ''Ra.'') is a comedy written by the Ancient Greek playwright Aristophanes. It was performed at the Lenaia, one of the Festivals of Dionysus in ...
'', which dates from around the end of the 5th century BC. The referenced passage from ''
The Frogs
''The Frogs'' ( grc-gre, Βάτραχοι, Bátrakhoi, Frogs; la, Ranae, often abbreviated ''Ran.'' or ''Ra.'') is a comedy written by the Ancient Greek playwright Aristophanes. It was performed at the Lenaia, one of the Festivals of Dionysus in ...
'' is as follows (usually dated at 405 BC):
According to Ben Tamari, the currency devaluation phenomenon was already recognized in ancient sources.
[Originally published as translated and updated in 2011 at ] He brings some examples which include the
Machpela Cave transaction and the building of the
Temple
A temple (from the Latin ) is a building reserved for spiritual rituals and activities such as prayer and sacrifice. Religions which erect temples include Christianity (whose temples are typically called churches), Hinduism (whose temples ...
from the Bible and the Mishna in tractate Bava Metzia (
Bava Metzia 4:1) from the
Talmud
The Talmud (; he, , Talmūḏ) is the central text of Rabbinic Judaism and the primary source of Jewish religious law (''halakha'') and Jewish theology. Until the advent of modernity, in nearly all Jewish communities, the Talmud was the cente ...
.
In China,
Yuan dynasty
The Yuan dynasty (), officially the Great Yuan (; xng, , , literally "Great Yuan State"), was a Mongol-led imperial dynasty of China and a successor state to the Mongol Empire after its division. It was established by Kublai, the fifth ...
economic authors
Yeh Shih
Ye () is a Chinese surname, Chinese-language surname. It is listed 257th in the Song dynasty Chinese classics, classic text ''Hundred Family Surnames'', and is the list of common Chinese surnames, 43rd most common surname in China, with a populati ...
and
Yuan Hsieh (c. 1223) were aware of the same phenomenon.
Ibn Taimiyyah
Ibn Taymiyyah (January 22, 1263 – September 26, 1328; ar, ابن تيمية), birth name Taqī ad-Dīn ʾAḥmad ibn ʿAbd al-Ḥalīm ibn ʿAbd al-Salām al-Numayrī al-Ḥarrānī ( ar, تقي الدين أحمد بن عبد الحليم ...
(1263–1328) described the phenomenon as follows:
Notably this passage mentions only the flight of good money abroad and says nothing of its disappearance due to hoarding or melting. Palestinian economist Adel Zagha also attributes a similar concept to medieval Islamic thinker
Al-Maqrizi
Al-Maqrīzī or Maḳrīzī (Arabic: ), whose full name was Taqī al-Dīn Abū al-'Abbās Aḥmad ibn 'Alī ibn 'Abd al-Qādir ibn Muḥammad al-Maqrīzī (Arabic: ) (1364–1442) was a medieval Egyptian Arab historian during the Mamluk era, kn ...
, who offered, claims Zagha, a close approximation to what would become known as Gresham's law centuries later.
In the 14th century it was noted by
Nicole Oresme
Nicole Oresme (; c. 1320–1325 – 11 July 1382), also known as Nicolas Oresme, Nicholas Oresme, or Nicolas d'Oresme, was a French philosopher of the later Middle Ages. He wrote influential works on economics, mathematics, physics, astrology an ...
,
[Woods, Thomas E. ''How The Catholic Church Built Western Civilization''.] in his treatise ''On the Origin, Nature, Law, and Alterations of Money'',
and by jurist and historian
Al-Maqrizi
Al-Maqrīzī or Maḳrīzī (Arabic: ), whose full name was Taqī al-Dīn Abū al-'Abbās Aḥmad ibn 'Alī ibn 'Abd al-Qādir ibn Muḥammad al-Maqrīzī (Arabic: ) (1364–1442) was a medieval Egyptian Arab historian during the Mamluk era, kn ...
(1364–1442) in the
Mamluk Empire.
Johannes de Strigys, an agent of
Ludovico III Gonzaga, Marquis of Mantua
Ludovico III Gonzaga of Mantua, also spelled Lodovico (also Ludovico II; 5 June 1412 – 12 June 1478) was the marquis of Mantua, ruler of the Italy, Italian city of Mantua from 1444 to his death in 1478.
Biography
Ludovico was the son of Gi ...
in
Venice
Venice ( ; it, Venezia ; vec, Venesia or ) is a city in northeastern Italy and the capital of the Veneto Regions of Italy, region. It is built on a group of 118 small islands that are separated by canals and linked by over 400 ...
, wrote in a June 1472 report ("that the bad money will chase out the good").
In the year that Gresham was born, 1519, it was described by
Nicolaus Copernicus
Nicolaus Copernicus (; pl, Mikołaj Kopernik; gml, Niklas Koppernigk, german: Nikolaus Kopernikus; 19 February 1473 – 24 May 1543) was a Renaissance polymath, active as a mathematician, astronomer, and Catholic Church, Catholic cano ...
in a
treatise
A treatise is a formal and systematic written discourse on some subject, generally longer and treating it in greater depth than an essay, and more concerned with investigating or exposing the principles of the subject and its conclusions."Treat ...
called : "bad (debased) coinage drives good (un-debased) coinage out of circulation". Copernicus was aware of the practice of exchanging bad coins for good ones and melting down the latter or sending them abroad, and he seems to have drawn up some notes on this subject while he was at
Olsztyn
Olsztyn ( , ; german: Allenstein ; Old Prussian: ''Alnāsteini''
* Latin: ''Allenstenium'', ''Holstin'') is a city on the Łyna River in northern Poland. It is the capital of the Warmian-Masurian Voivodeship, and is a city with county rights. ...
in 1519. He made them the basis of a report which he presented to the
Prussian Diet held in 1522, attending the session with his friend
Tiedemann Giese
Tiedemann Giese (1 June 1480 – 23 October 1550), was Bishop of Kulm (Chełmno) first canon, later Prince-Bishop of Warmia (Ermland). His interest in mathematics, astronomy, and theology led him to mentor a number of important young scholars, in ...
to represent his chapter. Copernicus's was an enlarged,
Latin
Latin (, or , ) is a classical language belonging to the Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) around present-day Rome, but through the power of the ...
version of that report, setting forth a general theory of money for the 1528 diet. He also formulated a version of the
quantity theory of money
In monetary economics, the quantity theory of money (often abbreviated QTM) is one of the directions of Western economic thought that emerged in the 16th-17th centuries. The QTM states that the general price level of goods and services is directly ...
.
[Angus Armitage, ''The World of Copernicus'', chapter 24: "The Diseases of Money", pp. 89–91] For this reason, it is occasionally known as the Gresham–Copernicus law.
Sir
Thomas Gresham
Sir Thomas Gresham the Elder (; c. 151921 November 1579), was an English merchant and financier who acted on behalf of King Edward VI (1547–1553) and Edward's half-sisters, queens Mary I (1553–1558) and Elizabeth I (1558–1603). In 1565 G ...
, a 16th century financial agent of the English Crown in the city of Antwerp, was one in a long series of proponents of the law, which he did to explain to
Queen Elizabeth I
Elizabeth I (7 September 153324 March 1603) was Queen of England and Ireland from 17 November 1558 until her death in 1603. Elizabeth was the last of the five House of Tudor monarchs and is sometimes referred to as the "Virgin Queen".
El ...
what was happening to the English shilling. Her father,
Henry VIII
Henry VIII (28 June 149128 January 1547) was King of England from 22 April 1509 until his death in 1547. Henry is best known for his six marriages, and for his efforts to have his first marriage (to Catherine of Aragon) annulled. His disa ...
, had replaced 40% of the silver in the coin with base metals, to increase the government's income without raising taxes. Astute English merchants and ordinary subjects saved the good shillings from pure silver and circulated the bad ones. Hence, the bad money would be used whenever possible, and the good coinage would be saved and disappear from circulation.
According to the economist
George Selgin
George Selgin (; born 1957) is an American economist. He is Senior Fellow and Director Emeritus of the Cato Institute's Center for Monetary and Financial Alternatives, where he is editor-in-chief of the center's blog, ''Alt-M'', Professor Emeritu ...
in his paper "Gresham's Law":
Gresham made his observations of good and bad money while in the service of Queen Elizabeth, with respect only to the observed poor quality of British coinage. Earlier monarchs, Henry VIII and Edward VI, had forced the people to accept debased coinage by means of legal tender laws. Gresham also made his comparison of good and bad money where the precious metal in the money was the same metal, but of different weight. He did not compare silver to gold, or gold to paper.
In his "Gresham's Law" article, Selgin also offers the following comments regarding the origin of the name:
Reverse of Gresham's law (Thiers' law)
In an influential theoretical article, Rolnick and Weber (1986) argued that bad money would drive good money to a premium, rather than driving it out of circulation. Their research did not take into account the context in which Gresham had made his observation. Rolnick and Weber ignored the influence of legal tender legislation, which requires people to accept both good and bad money as if they were of equal value. They also focused mainly on the interaction between different metallic monies, comparing the relative "goodness" of silver to that of gold, which is not what Gresham was speaking of.
The experiences of
dollarization
Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency. The process is also known as dollarization or euroization when the foreign currency is the dollar or the euro, respectively.
Currency subs ...
in countries with weak economies and currencies (such as
Israel
Israel (; he, יִשְׂרָאֵל, ; ar, إِسْرَائِيل, ), officially the State of Israel ( he, מְדִינַת יִשְׂרָאֵל, label=none, translit=Medīnat Yīsrāʾēl; ), is a country in Western Asia. It is situated ...
in the 1980s,
Eastern Europe
Eastern Europe is a subregion of the Europe, European continent. As a largely ambiguous term, it has a wide range of geopolitical, geographical, ethnic, cultural, and socio-economic connotations. The vast majority of the region is covered by Russ ...
and countries in the period immediately after the collapse of the
Soviet bloc
The Eastern Bloc, also known as the Communist Bloc and the Soviet Bloc, was the group of socialist states of Central and Eastern Europe, East Asia, Southeast Asia, Africa, and Latin America under the influence of the Soviet Union that existed du ...
, or
Ecuador
Ecuador ( ; ; Quechua: ''Ikwayur''; Shuar: ''Ecuador'' or ''Ekuatur''), officially the Republic of Ecuador ( es, República del Ecuador, which literally translates as "Republic of the Equator"; Quechua: ''Ikwadur Ripuwlika''; Shuar: ''Eku ...
throughout the late 20th and early 21st century) may be seen as Gresham's law operating in its reverse form (Guidotti & Rodriguez, 1992) because in general, the dollar has not been legal tender in such situations, and in some cases, its use has been illegal.
Adam Fergusson and
Costantino Bresciani-Turroni (in his book , published in 1931) pointed out that, during the great
inflation in the Weimar Republic
Hyperinflation affected the German Papiermark, the currency of the Weimar Republic, between 1921 and 1923, primarily in 1923. It caused considerable internal political instability in the country, the occupation of the Ruhr by France and Belgium, ...
in 1923, as the official money became so worthless that virtually nobody would take it, people simply stopped accepting the currency in exchange for goods. That was particularly serious because farmers began to hoard food. Accordingly, any currency backed by any sort of value became a circulating medium of exchange. In 2009,
hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe is an ongoing period of currency instability in Zimbabwe that, using Cagan's definition of hyperinflation, began in February 2007. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbab ...
began to show similar characteristics.
Those examples show that in the absence of effective legal tender laws, Gresham's Law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. If not given the choice and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their own possession, and pass the bad money to others.
In short, in the absence of legal tender laws, the seller will not accept anything but money of certain value (good money), but the existence of legal tender laws will cause the buyer to offer only money with the lowest commodity value (bad money), as the creditor must accept such money at face value.
Nobel Prize winner
Robert Mundell
Robert Alexander Mundell (October 24, 1932 – April 4, 2021) was a Canadian economist. He was a professor of economics at Columbia University and the Chinese University of Hong Kong.
He received the Nobel Memorial Prize in Economic Sciences i ...
believes that Gresham's Law could be more accurately rendered, taking care of the reverse, if it were expressed as: "Bad money drives out good ''if they exchange for the same price''."
The reverse of Gresham's Law, that good money drives out bad money whenever the bad money becomes nearly worthless, has been named "Thiers' law" by economist Peter Bernholz in honor of French politician and historian
Adolphe Thiers. "Thiers' Law will only operate later
n the inflationwhen the increase of the new flexible exchange rate and of the rate of inflation lower the real demand for the inflating money."
Analogs in other fields
The principles of Gresham's law can sometimes be applied to different fields of study. Gresham's law may be generally applied to any circumstance in which the true value of something is markedly different from the value people are required to accept, due to factors such as lack of information or governmental decree.
Vice President
Spiro Agnew
Spiro Theodore Agnew (November 9, 1918 – September 17, 1996) was the 39th vice president of the United States, serving from 1969 until his resignation in 1973. He is the second vice president to resign the position, the other being John ...
used Gresham's law in describing American
news media
The news media or news industry are forms of mass media that focus on delivering news to the general public or a target public. These include news agencies, print media (newspapers, news magazines), broadcast news (radio and television), and th ...
, stating that "Bad news drives out good news", although his argument was closer to that of a
race to the bottom
Race to the bottom is a socio-economic phrase to describe either government deregulation of the business environment or reduction in corporate tax rates, in order to attract or retain usually foreign economic activity in their jurisdictions. Whil ...
for higher ratings rather than over- and under-valuing certain kinds of news.
Gregory Bateson
Gregory Bateson (9 May 1904 – 4 July 1980) was an English anthropologist, social scientist, linguist, visual anthropologist, semiotician, and cyberneticist whose work intersected that of many other fields. His writings include '' Steps to an ...
postulated an analogue to Gresham's law operating in cultural evolution, in which "the oversimplified ideas will always displace the sophisticated and the vulgar and hateful will always displace the beautiful. And yet the beautiful persists."
Cory Doctorow
Cory Efram Doctorow (; born July 17, 1971) is a Canadian-British blogger, journalist, and science fiction author who served as co-editor of the blog ''Boing Boing''. He is an activist in favour of liberalising copyright laws and a proponent of ...
wrote that a similar effect to Gresham's law occurred in
carbon offset
A carbon offset is a reduction or removal of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxide-equivalent (CO2e). One ton of carbon ...
trading. The alleged information asymmetry is that people find it difficult to distinguish just how effective credits purchased are, but can easily tell the price. As a result, cheap credits that are ineffective can displace expensive but worthwhile carbon credits. The example given was
The Nature Conservancy
The Nature Conservancy (TNC) is a global environmental organization headquartered in Arlington, Virginia. it works via affiliates or branches in 79 countries and territories, as well as across every state in the US.
Founded in 1951, The Natu ...
offering cheap, yet "meaningless", carbon credits by purchasing cheap land unlikely to be logged anyway, rather than expensive and valuable land at risk of logging.
In the market for
used car
A used car, a pre-owned vehicle, or a secondhand car, is a vehicle that has previously had one or more retail owners. Used cars are sold through a variety of outlets, including franchise and independent car dealers, rental car companies, buy ...
s,
lemon automobiles (analogous to bad currency) will drive out the good cars.
[Phlips, Louis (1983)]
''The Economics of Price Discrimination''
p. 239. The problem is one of asymmetry of information. Sellers have a strong financial incentive to pass all used cars off as good cars, especially lemons. This makes it difficult to buy a good car at a fair price, as the buyer risks overpaying for a lemon. The result is that buyers will only pay the fair price of a lemon, so at least they reduce the risk of overpaying. High-quality cars tend to be pushed out of the market, because there is no good way to establish that they really are worth more.
Certified pre-owned programs are an attempt to mitigate this problem by providing a
warranty
In contract law, a warranty is a promise which is not a condition of the contract or an innominate term: (1) it is a term "not going to the root of the contract",Hogg M. (2011). ''Promises and Contract Law: Comparative Perspectives''p. 48 Cambrid ...
and other guarantees of quality. ''
The Market for Lemons
''The Market for Lemons: Quality Uncertainty and the Market Mechanism'' is a widely-cited 1970 paper by economist George Akerlof which examines how the quality of goods traded in a market can degrade in the presence of information asymmetry betwe ...
'' is a work that examines this problem in more detail.
See also
*
Adverse selection
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expe ...
*
Free silver
*
Inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
*
Junk silver
Junk may refer to:
Arts and entertainment
* ''Junk'' (film), a 2000 Japanese horror film
* '' J-U-N-K'', a 1920 American film
* ''Junk'' (novel), by Melvin Burgess, 1996
* ''Junk'', a novel by Christopher Largen
Music Groups
* Junk (band), a ...
, coins collected specifically for the value of their silver content
*
Lemon socialism
Lemon socialism is a pejorative term for a form of government intervention in which government subsidies go to weak or failing firms (''lemons''; see Lemon law), with the effective result that the government (and thus the taxpayer) absorbs part ...
*
List of eponymous laws
This list of eponymous laws provides links to articles on laws, principles, adages, and other succinct observations or predictions named after a person. In some cases the person named has coined the law – such as Parkinson's law. In other ...
*
List of multiple discoveries
Historians and sociologists have remarked upon the occurrence, in science, of " multiple independent discovery". Robert K. Merton defined such "multiples" as instances in which similar discoveries are made by scientists working independently of ea ...
*
Metal theft
Metal theft is "the theft of items for the value of their constituent metals". It usually increases when worldwide prices for scrap metal rise, as has happened dramatically due to rapid industrialization in India and China. Apart from precious m ...
*
Penny debate in the United States
A debate exists within the United States government and American society at large over whether the one-cent coin, the penny, should be eliminated as a unit of currency in the United States. The penny costs more to produce than the one cent it i ...
*
Seigniorage
Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
*
Worse is better
Worse is better (also called the New Jersey style) is a term conceived by Richard P. Gabriel in an essay of the same name to describe the dynamics of software acceptance. It refers to the argument that software quality does not necessarily increa ...
Notes
References
* Armitage, Angus, ''The World of Copernicus'', New York, Mentor Books, 1951.
* Bernholz, Peter and Gersbach, Hans, "Gresham's Law: Theory." The New Palgrave Dictionary of Money and Finance, vol. 2. Macmillan: London and Basingstoke 1992, 286–288.
*
Bush, Vannevar, (1950) ''Science, the Endless Frontier'', Report from the Director of the OSRD to President H. Truman
* Guidotti, P. E., & Rodriguez, C. A. (1992). Dollarization in Latin America – Gresham law in reverse. ''International Monetary Fund Staff Papers, 39'', 518–544.
*
*
Rothbard, M.N. (1980). ''
What Has Government Done to Our Money?'' Gresham's Law and Coinag
von Mises Institute
* Selgin, G., University of Georgia (2003)
Gresham's Law
*
*
External links
*
''Gresham's Law'' by George Selgin(archived 21 February 2012)
*
ttp://www.coinflation.com Coinflation.com– illustrates Gresham's Law based upon the current metal value of coins in circulation.
{{DEFAULTSORT:Gresham's Law
Adages
Monetary policy
Economics laws
Eponyms
Metallism
International trade theory
Nicolaus Copernicus
1858 in economics