Gresham's Law

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Gresham's law:

see under Gresham, Sir ThomasGresham, Sir Thomas
, 1519?–1579, English merchant and financier. As the royal financial agent in Antwerp after 1551 he proved himself very able, though his methods were frequently more effective than ethical.
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Gresham's Law

(ECONOMICS) the hypothesis, associated with the Elizabethan merchant-financier, Sir Robert Gresham, that ‘bad money tends to drive good money out of circulation’, where ‘bad money’ is money which contains less bullion value for a stated face value than ‘good money’. The ‘law’ is particularly of interest as an early, archetypal, example of many laws in economics which assume individuals act rationally (see FORMAL AND SUBSTANTIVE RATIONALITY). see also IDEAL TYPE.

Gresham’s Law

 

an economic law, formulated by the 16th-century English statesman and financier T. Gresham, that states: “Bad money drives out good.” Actually this principle was known before him, as it had been noted that, upon circulation of coins of the same nominal denomination but different value, the lower-value coin assumes the function of circulating currency while the higher-value coin is hoarded, melted down into ingots, or taken abroad. For metal currency, this law had already been formulated by N. Copernicus in 1526. A full scientific analysis of the phenomena stated in Gresham’s law is given by the Marxist theory of money (see K. Marx, Contribution to the Critique of Political Economy, as well as Das Kapital, vol. 1, ch. 3).

The action of Gresham’s law is typical for bimetallism when, upon the legal establishment of a value ratio for gold and silver (for instance, 1:15), both gold and silver coins of appropriate weight and with the same nominal exchange value are freely minted from private metal reserves. When the market price of silver falls, say to a ratio of 1:20, it becomes profitable to exchange only silver coins. Gresham’s law also acts in the case of inflation: with the devaluation of paper money resulting from overissue, the population hoards gold and silver coins while the paper money usually remains in circulation.