Gresham's Law

In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation.

The law was named in 1860 by Henry Dunning Macleod, after Sir Thomas Gresham (1519–1579), who was an English financier during the Tudor dynasty. However, there are numerous predecessors. The law had been stated earlier by Nicolaus Copernicus; for this reason, it is occasionally known as the Copernicus Law. It was also stated in the 14th century, by Nicole Oresme c. 1350, in his treatise On the Origin, Nature, Law, and Alterations of Money, and by jurist and historian Al-Maqrizi (1364–1442) in the Mamluk Empire; and noted by Aristophanes in his play The Frogs, which dates from around the end of the 5th century BC.

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 metals, nickel, or copper).

In the absence of legal-tender laws, metal coin money will freely exchange at somewhat above bullion market value. This may be observed in bullion coins such as the Canadian Gold Maple Leaf, the South African Krugerrand, the American Gold Eagle, or even the silver Maria Theresa thaler (Austria). 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 the coins of equal weight. The price spread between face value and commodity value is called seigniorage. Because some coins do not circulate, remaining in the possession of coin collectors, this can increase demand for coinage.

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