Gresham's Law - Explained
What is Gresham's Law?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
What is Gresham's Law?
Gresham's law is a monetary principle based on observation in economics that in currency evaluation, when two coins are equal in face value but unequal in intrinsic value (cost of material), the one having less intrinsic value tends to remain in the market circulation, whereas the other disappears to be hoarded or exported as bullion. The law is named after Sir Thomas Gresham (1519-79), a leading English financial adviser to Queen Elizabeth I.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
Why is Gresham's Law Important?
It states that "bad money drives out good." Where bad refers to the coin with lesser intrinsic value and good refers to the coin with more intrinsic value. In older times, coins were made of gold, silver and other precious metals, which gave them their value. Over time, there was a decrease in the number of precious metals used in making coins because the metals were worth more than the face value mentioned in the coin. The new coins were given the same face value as the existing coins to facilitate the transactions conducted by the people. Because the intrinsic value of the old coins was higher than the coin's face value, people started melting down the coins and sell the metal itself, or hoarding them as a store of value. The new coins with less intrinsic value were considered as overvalued and hence its expenditure increased more than coins with more intrinsic value as they were considered as undervalued, leading to hoarding effect, driving them out of circulation as currency.
Name Origin of Gresham's Law
In the administration of Queen Elizabeth, different metals were in circulation as currency. Some coins were of more intrinsic value than others of the same monitory value. The coins made of the inferior metal tended to drive the better out of circulation as currency. This is because the better coins were either hoarded or melted down and sold as bullion or in foreign exchanges, or used in the fine arts. This was observed by Gresham and also stated at least 40 years before Gresham by Nicolaus Copernicus. The theory was not formalized until the middle of the 19th century by Scottish economist Henry Dunning Macleod in name of Sir Gresham. In some parts of Europe (mostly Central and Eastern Europe) this law is also known as Copernicus Law.
- Legal Tender
- Gresham's Law
- Double Coincidence of Wants
- Functions of Money
- Medium of Exchange
- Unit of Account
- Store of Value
- Time Value of Money
- Standard of Deferred Payment
- Liquidity Preference Theory
- National Savings and Investment Identity
- Circular Flow of Money
- Commodity Money
- Gold Exchange Standard
- Bretton Woods System
- Fiat Money
- Money Supply
- M1 and M2 Money Supply
- Monetary Base
- Savings, Demand, and Time Deposits
- How Do Banks Create Money?
- Financial Intermediary
- Bank Balance Sheet
- Money Multiplier Formula
- Velocity of Money
- Multiplier Effect
- Quantity Equation of Money
- McCallum Rule
- Neutrality of Money
- Real Bills Theory
- Banking System?
- Central Bank
- Federal Reserve System
- Federal Open Market Committee (FOMC)
- Fed Balance Sheet
- Term Auction Facility
- Taylor Rule
- How is the Federal Reserve Bank Organized?
- What is Bank Regulation?
- CAMELS Rating
- Bank Supervision
- Bank Runs
- What is Deposit Insurance?
- Federal Deposit Insurance Corporation
- Lender of Last Resort
- Central Banks Carry Out Monetary Policy
- Open Market Operations
- Bank Reserve
- Discount Rate
- Federal Funds Rate
- Monetary Policy
- Contractionary and Expansionary Monetary Policy
- Loose vs Tight Monetary Policy
- Easy Monetary Policy
- Accommodative Monetary Policy
- Dove & Hawk (Monetary Policy) - Explained
- Tight Monetary Policy - Explained
- Stabilization Policy
- Pushing on a String
- The Effect of Monetary Policy on Interest Rates
- Federal Funds Rate
- Gibson Paradox
- Vasicek Interest Rate Model
- Equation of Exchange (Economics)
- The Effect of Monetary Policy on Aggregate Demand
- Quantitative Easing
- Reserve Currency
- What are Excess Reserves?
- Unpredictable Movements of Velocity
- Central Banks - Unemployment and Inflation
- Inflation Targeting
- Fisher Effect
- Asset Bubbles and Leverage Cycles
- Money Capital Market
- Quantity Theory of Money
- Aggregate Expenditure Model
- IS-LM Model
- European Capital Market Institute