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 gradually disappear from circulation.It has often struck our notice that the course our city runsIs the same towards men and money. She has true and worthy sons:She has good and ancient silver, she has good and recent gold.These are coins untouched with alloys; everywhere their fame is told;Not all Hellas holds their equal, not all Barbary far and near.Gold or silver, each well minted, tested each and ringing clear.Yet, we never use them! Others always pass from hand to hand.Sorry brass just struck last week and branded with a wretched brand.So with men we know for upright, blameless lives and noble names.Trained in music and palaestra, freemen's choirs and freemen's games,These we spurn for men of brass...If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches (amwal) which they possess, by decreasing their value as the old coins will now become merely a commodity. He will do injustice to them by depriving them of the higher values originally owned by them. Moreover, if the intrinsic values of coins are different it will become a source of profit for the wicked to collect the small (bad) coins and exchange them (for good money) and then they will take them to another country and shift the small (bad) money of that country (to this country). So (the value of) people's goods will be damaged.As for Gresham himself, he observed 'that good and bad coin cannot circulate together' in a letter written to Queen Elizabeth on the occasion of her accession in 1558. 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. It was owing to these debasements, Gresham observed to the Queen, that 'all your fine gold was convayed out of this your realm.'The expression 'Gresham's Law' dates back only to 1858, when British economist Henry Dunning Macleod (1858, pp. 476–8) decided to name the tendency for bad money to drive good money out of circulation after Sir Thomas Gresham (1519–1579). 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. The concept can be traced to ancient works, including Aristophanes' The Frogs, where the prevalence of bad politicians is attributed to forces similar to those favoring bad money over good. 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 gradually 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, the concept itself had been previously expressed by others, including by Aristophanes in his play The Frogs, which dates from around the end of the 5th century BC, 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 in 1519 by Nicolaus Copernicus in a treatise called Monetae cudendae ratio For this reason, it is occasionally known as the Gresham–Copernicus law. 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) and the Libertad (Mexico). 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. As some coins do not circulate, remaining in the possession of coin collectors, this can increase demand for coinage.