Gresham's law


Gresham's law
the tendency of the inferior of two forms of currency to circulate more freely than, or to the exclusion of, the superior, because of the hoarding of the latter.
[1855-60; named after Sir T. GRESHAM]

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Observation that "bad money drives out good.

" It is named for Sir Thomas Gresham (1519–1579), financial agent of Queen Elizabeth I, who was one of the first to elucidate it (he had been preceded by Copernicus). The meaning expressed is that, if two coins have the same face value but are made from metals of unequal value, the cheaper will tend to drive the other out of circulation; the more valuable coin will be hoarded or used for foreign exchange instead of for domestic transactions.

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      observation in economics that “bad money drives out good.” More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation. Sir Thomas Gresham (Gresham, Sir Thomas), financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham's law in the 19th century.

      Money functions in ways other than as a domestic medium of exchange (exchange rate); it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the “inferior” money had driven it out.

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Universalium. 2010.

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