Gresham's Law
Gresham's lawstated as, "Where legal tender laws exist, bad money drives out good money".Gresham's law applies specifically when theretwo formsmoneycirculation whichforced, byapplicationlegal tender laws,be respected as havingsame face value inmarketplace.
Gresham's Law has found usemany fields other than finance or economics. Itnamed after Sir Thomas Gresham, an English financierTudor times.
Good Money: Money whose face valueequal tointrinsic or historic value ofmaterial itmade of. An example isUS dollar, which, prior to1900's was equal1/20.67 ouncegold.
Bad Money: Money that has an intrinsic or historic value less than its face value. In Gresham's day, this was coins that had been "debased," usually by cutting or scraping some ofmetal off. Other examples"bad" money would be counterfeit coinscoins issued bymint thatminted from metal withlower market value than previously. In modern times bad moneyrecognised as,example,1965 US Half-Dollars which were made from only 40% silver. The previous yearhalf-dollar was 90% silver. Withrelease of1965 dollar, which was legally requiredbe accepted atsame value asprevious year's 90% halves,older 90% silver coinage ofUS beganbe hoarded whiledebased money was allowedcirculateits stead.
Gresham's law says thatmoney forced into circulation under legal tender law tendsbe dominated by"bad" money. Thisbecause people will spend"bad" coins rather than"good" oneshoard"good" ones. Ifgood coins haveface value belowvaluetheir metallic contentwill even go as far asmelt them downsellmetalwhat itworth. The "good" coins also tendretain more lasting valueinternational traders, since overseas tradersnot bound by legal tender laws. The coins then leave their countryorigin. Thusgood money escapes legal tender laws,leaves"bad" money behind. This occurredBritain duringperiod ofGold Exchange Standard.
This shows thatabsencelegal tender laws Greshams law worksreverse. When peoplegivenfree choice between accepting good money or accepting bad money,valueall money finds its intrinsic or historic value inmarketplace. Infree economy, bad money becomes less popular than good money,is eventually driven back torefineries. Thus,bad moneydrive out good, as stated infirst paragraph, legal tender lawsnecessary.
The same principle has been appliedmany different fields. Diploma mills existproduce lower-value qualifications. AccordingGreshams law asappliesmoney, these "bad" diplomas oughtdrive out"good diplomas". However, unlikelegal tender lawsmoney, thereno law forcing employersaccept all diplomas as beingequal value. Consequently, each employerfreeassessvaluequalifications onfree market based on wherecame from, andjudgevalue each diploma assee fit.
The first recorded expressionGresham's lawprobablybe found inplay The Frogs written by Aristophanes and usually dated at 405 B.C.:
- ''The course our city runs issame towards menmoney.
- ''She has trueworthy sons.
- ''She has fine new goldancient silver,
- ''coins untouchedalloys, gold or silver,
- ''each well minted, tested eachringing clear.
- ''Yet we never use them!
- ''Others pass from handhand,
- ''sorry brass just struck last weekbranded withwretched brand.
- ''Somen we knowupright, blameless livesnoble names.
- These we spurnmenbrass....
