Gresham's Law
Also known as: Bad Money Drives Out Good, The Law of Debased Currency
Formulated by Sir Thomas Gresham (1858)
Definition
An economic principle stating that when two forms of currency are in circulation with the same legal face value, but one is undervalued relative to its intrinsic worth (e.g. a debased or clipped coin) while the other is fairly or overvalued relative to its intrinsic worth, people will hoard or export the 'good' money and spend only the 'bad' money. The result is that sound currency disappears from everyday circulation while debased currency dominates transactions. The observation predates its namesake, appearing in ancient and medieval commentary on coinage debasement, but it is named after 16th-century English financier Sir Thomas Gresham, an advisor to the Tudor monarchs; the phrase itself was coined in 1858 by economist Henry Dunning Macleod, who attributed the underlying idea to Gresham. The classic illustration is a bimetallic standard: if the official exchange rate between gold and silver coins does not match their true market value, whichever metal is undervalued by that official rate gets hoarded, melted down, or exported, while the overvalued metal floods circulation.