Gresham's law


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Gresham's Law

The theory that given two types of money with the same nominal value but different real values, the "bad" money will be spent while the "good" money will be hoarded. Strictly, the law only applies if the exchange rate between the two monies is decreed by the state, but it is sometimes invoked more broadly. While it does not always hold true, one example was the hoarding of U.S. coins in the 20th century as they gradually came to be minted with less valuable metals.

Gresham's law

the economic hypothesis that ‘bad’ MONEY forces ‘good’ money out of circulation. The principle applies only to economies the domestic money system of which is based upon metal coinage that embodies a proportion of intrinsically valuable metals such as silver and gold. Where governments issue new coins embodying a lower proportion of valuable metals, people are tempted to hoard the older coins for the commodity value of their metal content so that the ‘good’ money ceases to circulate as currency.
References in periodicals archive ?
447): "Bad money, says Gresham's Law, drives good money out of the country.
Again, the promotion of mass literacy is a noble experiment, but apparently there is no way to accommodate our idea of it to the insidious action of Gresham's law.
The florin remained in circulation and Gresham's law did not operate.
Thus, legal constraints provide only a partial explanation for the activation of Gresham's law.
There are various accounts of moneychangers' role in the activation of Gresham's law based on asymmetries of information.
When it comes to modern fiat money systems, Gresham's law has lost most of its grip, because the two explanations underlying the law hinge on features specific to the commodity money system.
Still, there remains one factor that can put Gresham's law into play today: government interference in the circulation of currencies.
Gresham's law says bad money tends to drive good money out of circulation.
If some agents lack information concerning the intrinsic values of different currencies, something like Gresham's law can occur even where nonpar exchange is costless.
In their textbook, Freixas and Rochet [1997, 40-45] purport to show how competitive note issuance tends to be undermined by free rider and "lemon" problems, resulting in a Gresham's law outcome.
Akerlof's lemon argument seems more applicable in this case than Gresham's Law.
Monetary indivisibility is a consequence of the operation of Gresham's Law that is not commonly appreciated.