Gresham's law

1842 "shield back" sovereign: replaced now by a piece of paper

Gresham's law is commonly written: "Bad money drives out good."

If people want one thing ("good" money) more than the other ("bad" money), they will always offer the bad money in trade before the good money. Over time, the good money will be kept in pocket, and only the bad money will be found in the market. The law is named after Sir Thomas Gresham (1519-1579). Gresham founded the Royal Exchange in 1565.

Examples

Silver coins were widely circulated in Canada (until 1968) and in the United States (until 1964 for dimes (ten cents) and quarters and 1970 for half dollars). However, these countries made their coins cheaper to make by switching to cheaper metals. The silver coins disappeared from circulation as people kept them for the value of their metal. The new coins had value as coins, but less value as metal.

The same process happens now with the copper content of coins such as the pre-1997 Canadian penny (one cent), the pre-1982 United States penny and the pre-1992 UK copper pennies and two pence. This also occurred even with coins made of less expensive metals such as steel in India.^[1]

References

1. [1] "Sharp practice of melting coins" – BBC News (accessed 30 May 2009)