Gresham's law
[1][2] The law was named in 1857 by economist Henry Dunning Macleod after Sir Thomas Gresham (1519–1579), an English financier during the Tudor dynasty.
The concept was thoroughly defined in Renaissance Europe by Nicolaus Copernicus and known centuries earlier in classical Antiquity, the Near East, and China.
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.
A similar situation occurred in 2007 in the United States with the rising price of copper, zinc, and nickel, which led the U.S. government to ban the melting or mass exportation of one-cent and five-cent coins.
[5] 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.
[6] Austrian economist Hans-Hermann Hoppe said that "so-called Gresham's law" only applies under certain conditions, largely a result of governmental interventionist policies.
In his 2021 book, Economy, Society, and History Hoppe states:You might have heard about the so-called Gresham's law, which states that bad money drives out good money, but this law only holds if there are price controls in effect, only if the exchange ratios of different monies are fixed and no longer reflect market forces.
The referenced passage from The Frogs is as follows (usually dated at 405 BC):[8] It has often struck our notice that the course our city runs Is the same towards men and money.
[14] In the 14th century it was noted by Nicole Oresme c. 1350,[15][full citation needed] in his treatise On the Origin, Nature, Law, and Alterations of Money,[16] and by jurist and historian Al-Maqrizi (1364–1442) in the Mamluk Empire.
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 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 to represent his chapter.
Copernicus's Monetae cudendae ratio was an enlarged, Latin version of that report, setting forth a general theory of money for the 1528 diet.
Her father, Henry VIII, 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.
The statement was part of Gresham's explanation for the "unexampled state of badness" that England's coinage had been left in following the "Great Debasements" of Henry VIII and Edward VI, which reduced the metallic value of English silver coins to a small fraction of what it had been at the time of Henry VII.
Earlier monarchs, Henry VIII and Edward VI, had forced the people to accept debased coinage by means of legal tender laws.
However, references to such a tendency, sometimes accompanied by discussion of conditions promoting it, occur in various medieval writings, most notably Nicholas Oresme's (c. 1357) Treatise on money.
[21]The experiences of dollarization in countries with weak economies and currencies (such as Israel in the 1980s, Eastern Europe and countries in the period immediately after the collapse of the Soviet bloc, or Ecuador 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.
[22] Adam Fergusson and Costantino Bresciani-Turroni (in his book Le vicende del marco tedesco, published in 1931) pointed out that, during the great inflation in the Weimar Republic in 1923,[dubious – discuss] as the official money became so worthless that virtually nobody would take it, people simply stopped accepting the currency in exchange for goods.
Nobel Prize winner Robert Mundell 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.
"[29] Cory Doctorow wrote that a similar effect to Gresham's law occurred in carbon offset 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.
This makes it difficult to buy a good car at a fair price, as the buyer risks overpaying for a lemon.
