WHAT IS “GRESHAM’S LAW” OF MONEY ECONOMICS?

Is it still relevant today?

Courtesy: www.CertifiedMedicalPlanner.org

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, there are predecessors.

The law had been stated earlier by Nicolaus Copernicus. It was also stated in the 14th century, by Nicole Oresme 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 noted by Aristophanes in his play The Frogs, which dates from around the end of the 5th century BC.

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IOW: It is the tendency for money of lower intrinsic value to circulate more freely than money of higher intrinsic and equal nominal value (often expressed as “Bad money drives out good”).

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Gresham’s Law applies to new coins and worn coins. Worn coins are likely to have lost some of their metallic weight through wear and tear, so they should have less value than new coins. But government sets them to have the same value. Thus worn coins are artificially overvalued and new coins are artificially undervalued.

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So, is Gresham’s Law still relevant today?

THINK: The modern Bitcoin, and related crypto-currency, controversy? We asked colleague Timothy J. McIntosh CFP® MPH CFA for some insights.

ESSAY: https://medicalexecutivepost.com/2014/01/23/understanding-currencies-bitcoins/

Assessment

Your thoughts are appreciated.

Conclusion

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2 Responses

  1. THEIR’S LAW (REVERSE OF GRESHAM’S LAW) 

    In an influential theoretical article, Rolnick and Weber (1986) argued that bad money would drive good money to a premium rather than driving it out of circulation. However, their research did not take into account the context in which Gresham made his observation. Rolnick and Weber ignored the influence of legal tender legislation which requires people to accept both good and bad money as if they were of equal value.They also focused mainly on the interaction between different metallic monies, comparing the relative “goodness” of silver to that of gold, which is not what Gresham was speaking of. 

    The experiences of dollarization in countries with weak economies and currencies (for example Israel in the 1980s, Eastern Europe and countries in the period immediately after the collapse of the Soviet bloc, or South American countries throughout the late 20th and early 21st century) may be seen as Gresham’s Law operating in its reverse form (Guidotti & Rodriguez, 1992), because in general the dollar has not been legal tender in such situations, and in some cases its use has been illegal.

    Dr. David E. Marcinko MBA

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  2. BITCOIN?

    Gresham’s law is a threat to bitcoin adoption. Gresham’s law is colloquially stated as “the tendency for bad money to drive out good money.”

    This happens because the consumer will find it preferable get rid of their “bad money” and as a result when they have to spend something, they will spend the “bad money” and it will end up being the money that is most widely accepted. It is used regularly to argue against private currencies with individuals like W.S. Jevons even citing it as the reason that “there is nothing less fit to be left to the action of competition than money.”

    https://mises.org/power-market/bitcoin-hodling-and-greshams-law

    Dr. David E. Marcinko MBA

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