Gresham's law is commonly stated: "Bad money drives out good. "

Gresham's law applies specifically when there are two forms of commodity money in circulation which are forced, by the application of legal-tender laws, to be respected as having the same face value in the marketplace. Commodity money is Money whose value comes from a Commodity out of which it is made Legal tender or forced tender is Payment that by Law, cannot be refused in settlement of a Debt ( Debtor cannot successfully be sued Face value is the value of a Coin, stamp or Paper money, as printed on the coin stamp or bill itself by the minting authority

Gresham's law is named after Sir Thomas Gresham (1519 – 1579), an English financier in Tudor times. Sir Thomas Gresham (c 1519 &ndash 21 November, 1579) was an English Merchant and Financier who worked for King Edward VI of England Financier (fɨˈnænsiɚ or finãˈsje in French is a term for a person who handles large sums of Money, usually involving money lending, financing The Tudor dynasty or House of Tudor was an English royal Dynasty that lasted 118 years from 1485 to 1603 a period known as the Tudor period

Contents 1 Definitions 1.1 "Good money" 1.2 "Bad money" 2 Theory 3 History of the concept 3.1 Origin of the name 4 The law in reverse 5 The law in other fields 6 See also 7 Notes 8 References 9 External links

Definitions

The terms "good" and "bad" money are used in a technical non-literal sense, and with regard to exchange values imposed by legal-tender legislation, as follows:

"Good money"

Good money is money that shows little difference between its exchange value and its commodity value. In Political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i In the field of Economics, the Commodity value of a good is its Free market Intrinsic value under optimal use conditions In the original discussions of Gresham's law, money was conceived of entirely as metallic coins, so the commodity value was the market value of the coined bullion of which the coins were made. The M acro E xpansion T emplate A ttribute L anguage complements TAL, providing macros which allow the reuse of code across main - title Coin keywords numismatics coin review Market value is the price at which an asset would trade in a competitive Walrasian auction setting Precious Metal is the eighteenth episode in the of the popular American Crime drama, which is set in Las Vegas, Nevada.

An example is the US dollar, which was equal to 1/20. The United States dollar ( sign: $; code: USD) is the unit of Currency of the United States; it has also been 67 ounce (1. This article is about the unit of mass For the unit of force see Pound-force. 5048 g) of gold until 1934 — and carried an exchange value (at those fixed rates) roughly equal to its coined-gold market value. Gold (ˈɡoʊld is a Chemical element with the symbol Au (from its Latin name aurum) and Atomic number 79 Subsequently, from the 1934 devaluation by Roosevelt (Executive Order 6102) through late 1971 (the Nixon Shock), the US dollar was equal to 1/35 ounce (0. Executive Order 6102 is an Executive Order signed on April 5, 1933 by U The term Nixon Shock is used to refer to two different policy measures taken by U 887 g) of gold. Gold (ˈɡoʊld is a Chemical element with the symbol Au (from its Latin name aurum) and Atomic number 79

In the absence of legal-tender laws, metal-coin money will freely exchange at somewhat above bullion market value. Legal tender or forced tender is Payment that by Law, cannot be refused in settlement of a Debt ( Debtor cannot successfully be sued Precious Metal is the eighteenth episode in the of the popular American Crime drama, which is set in Las Vegas, Nevada. Market value is the price at which an asset would trade in a competitive Walrasian auction setting This is not a purely theoretical result, but rather may be observed today in bullion coins such as the Krugerrand (South Africa) and the American Gold Eagle (United States). A Krugerrand is a South African Gold coin, first minted in 1967 in order to help market South African gold The Republic of South Africa (also known by other official names) is a country located at the southern tip of the continent of Africa For the $10 pre-1932 US gold circulation coin see Eagle Specifications Each of the four sizes contains 91 The United States of America —commonly referred to as the Coined money is of a known purity, and in a convenient form to handle. People prefer trading in coins than in anonymous hunks of bullion, so they attribute more value to the coins. There is also a certain demand from coin collectors. Coin collecting is the Collecting or trading of Coins or other forms of legally minted currency Thus, coining is frequently profitable. Seigniorage (ˈseɪnjərɪdʒ '''''sei'''nY'Ridj'') also spelled seignorage or seigneurage, is the net Revenue derived from the issuing of

"Bad money"

Bad money is money that has a substantial difference between its commodity value and its market value, where market value is lower than exchange value, or the actual value is lower than the market value.

In Gresham's day, bad money included any coin that had been "debased. main - title Coin keywords numismatics coin review " Debasement was often done by members of the public, cutting or scraping off some of the metal. The M acro E xpansion T emplate A ttribute L anguage complements TAL, providing macros which allow the reuse of code across Coinage could also be debased by the issuing body, whereby less than the officially mandated amount of precious metal is contained in an issue of coinage, usually by alloying it with base metal. An alloy is a Solid solution or Homogeneous mixture of two or more elements, at least one of which is a Metal, which itself has Other examples of "bad" money include counterfeit coins made from base metal. A counterfeit is an imitation that is made usually with the intent to deceptively represent its content or origins In all of these examples, the market value was the supposed value of the coin in the market.

In the case of clipped, scraped or counterfeit coins, the market value has been reduced by fraud, while the exchange value remains at the higher value. On the other hand, with coinage debased by a government issuer the market value of the coinage was often reduced quite openly, but the exchange value of the debased coins was held at the higher level by legal tender laws.

All modern money is "bad money" in this sense, since fiat money has entirely replaced the commodity money to which Gresham's law applies. The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be The ubiquity of fiat money could indeed be taken as evidence for the truth of Gresham's law.

Theory

Gresham's law says that any circulating currency consisting of both "good" and "bad" money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the "bad" money. This is because people spending money will hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for themselves.

Consider a customer purchasing an item which costs five pence, who has in their possession several silver sixpence coins. Some of these coins are more debased, while others are less so — but legally, they are all mandated to be of equal value. The customer would prefer to retain the better coins, and so offers the shopkeeper the most debased one. In turn, the shopkeeper must give one penny in change — and has every reason to give the most debased penny. Thus, the coins that circulate in the transaction will tend to be of the most debased sort available to the parties.

If "good" coins have a face value below that of their metallic content, individuals may be motivated to melt them down and sell the metal for its higher bullion value, even if such defacement is illegal. For an example of this, consider the 1965 US Half-dollars which were made from only 40% silver. The half dollar of the United States, sometimes known as the fifty-cent piece, has been produced nearly every year since the inception of the United States Silver (ˈsɪlvɚ is a Chemical element with the symbol " Ag " (argentum from the Ancient Greek: ἀργήντος - argēntos gen The previous year the half-dollar was 90% silver. With the release of the 1965 half, which was legally required to be accepted at the same value as the previous year's 90% halves, the older 90% silver coinage of the US quickly disappeared from circulation, and the debased money was allowed to circulate in its stead. As the price of bullion silver rose above the face value of the coins, many of those old half-dollars were melted down. With the 1971 issue the government gave up on including any silver in the half dollars. A similar situation is currently (2007) occurring with the rising price of zinc and copper, and has led the U. Zinc (ˈzɪŋk from Zink is a Metallic Chemical element with the symbol Zn and Atomic number 30 Copper (ˈkɒpɚ is a Chemical element with the symbol Cu (cuprum and Atomic number 29 S. government to ban the melting or mass exportation of one and five cent coins, respectively. The United States one-cent coin is a unit of Currency equaling one one-hundredth of a United States dollar. The United States five- cent Coin, commonly called a nickel, is a unit of Currency equaling one-twentieth or five hundredths of a

In addition to being melted down for its bullion value, money that is considered to be "good" tends to leave an economy through international trade. International traders are not bound by legal tender laws the way citizens of the country are, so they will offer higher value for good coins than bad ones, and thus higher value than can be obtained within the country. The good coins may leave their country of origin to become part of international trade. Thus, the good money is driven out of the country of issue, escaping that country's legal tender laws and leaving the "bad" money behind. This occurred in Britain during the period of the Gold Exchange Standard. The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set fixed quantities of Gold

History of the concept

According to George Selgin in his paper "Gresham's Law":

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" 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 that value had been at the time of Henry VII. Henry VIII (28 June 1491 &ndash 28 January 1547 was King of England and Lord of Ireland, later King of Ireland and claimant to the Kingdom of Edward VI (12 October 1537 &ndash 6 July 1553 became King of England and Ireland on 28 January 1547 and was crowned on 20 February at the age of nine It was owing to these debasements, Gresham observed to the Queen, that "all your ffine goold was convayd ought of this your realm. "

Gresham made his observations of good and bad money while in the service of Queen Elizabeth, with respect only to the observed poor quality of the British coinage. The previous monarchs, Henry VIII and Edward VI, had forced the people to accept debased coinage by means of their legal tender laws. Gresham also made his comparison of good and bad money where the precious metal in the money was the same. He did not compare silver to gold, or gold to paper.

An early form of Gresham's Law was described by Nicolaus Copernicus in the treatise Monetae cudendae ratio, first drawn up in the year (1519) that Thomas Gresham was born. Monetae cudendae ratio (also spelled Monetæ cudendæ ratio) is a treatise on Money by Nicolaus Copernicus written in 1526 published in 1816 Copernicus wrote that "bad (debased) coinage drives good (un-debased) coinage out of circulation. "^[1]

Origin of the name

George Selgin in his paper "Gresham's Law" offers the following comments:

The expression "Gresham's Law" dates back only to 1858, when British economist Henry Dunning Macleod (1858, p. George A Selgin is a professor of Economics in the Terry College of Business at the University of Georgia. Henry Dunning Macleod ( 1821 - July 16, 1902) Scottish Economist, was born in Edinburgh, and educated at Eton 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. Aristophanes (Ἀριστοφάνης ˌærɪˈstɒfəniːz in English ca

The passage from The Frogs referred to is as follows; it is usually dated at 405 B. Frogs ( Ancient Greek: grc Βάτραχοι grc-Latn Bátrachoi) is a comedy written by the Ancient Greek playwright Aristophanes. C. :

The course our city runs is the same towards men and money.

She has true and worthy sons.

She has fine new gold and ancient silver,

coins untouched with alloys, gold or silver,

each well minted, tested each and ringing clear.

Yet we never use them!

Others 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.

These we spurn for men of brass. . . .

The law in reverse

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 moneys, 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 twentieth and early twenty-first century) may be seen as Gresham's Law operating in its reverse form (Guidotti & Rodriguez, 1992), since in general the dollar has not been legal tender in such situations, and in some cases its use has been illegal. Dollarization occurs when the inhabitants of a country use foreign Currency in parallel to or instead of the domestic currency For a topic outline on this subject see List of basic Israel topics. Eastern Europe is a general term that refers to the Geopolitical region encompassing the easternmost part of the European continent. During the Cold War, the term Communist Bloc (or Soviet Bloc) was used to refer to the Soviet Union and countries it either controlled or that were South America is a Continent of the Americas, situated entirely in the Western Hemisphere and mostly in the Southern Hemisphere, with a The twentieth century of the Common Era began on

These examples show that in the absence of legal tender laws, Gresham's law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. However, if not given the choice, and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession, and pass on the bad money to someone else. Said in another way, in the absence of legal tender laws, the seller will not accept anything but money of real worth (good money), while the existence of legal tender laws will force the seller to accept money with no commodity value (bad money). Thus, the buyer will always try to spend his bad money first, but in the absence of legal tender laws, the seller will not accept money with no real worth.

The law in other fields

The principles of Gresham's Law can sometimes be applied to different fields of study. Gresham's Law generally speaks to any circumstance in which the "true" value of something is markedly different from the value people must accept, due to factors such as lack of information or governmental decree.

In the market for second hand cars, lemon automobiles (analogous to bad currency) will drive out the good cars. A lemon is a defective car that when purchased new or used is found by the purchaser to have numerous or severe defects not readily apparent before the purchase The problem is one of asymmetry of information. Sellers have a strong financial incentive to pass all cars off as "good" cars, especially lemons. This makes it chancy to buy a good car at a fair price, as the buyer risks overpaying for a lemon. The result is that buyers will only pay the fair price of a lemon, so at least they won't be ripped off. High quality cars tend to be pushed out of the market, because there is no good way to establish that they really are worth more. The Market for Lemons is a work that examines this problem in more detail. "The Market for Lemons Quality Uncertainty and the Market Mechanism" is a 1970 paper by the economist George Akerlof.

Gresham's Law poses a similar trap in education. ^[2] For instance, The Economist, writing on the No Child Left Behind act's effect on U. The Economist is an English-language weekly news and International affairs publication owned by The Economist Newspaper Ltd and edited in London The No Child Left Behind Act of 2001 (Public Law 107-110 often abbreviated in print as NCLB and sometimes shortened in pronunciation to "nickelbee" is a controversial S. schools, said:

Joel Klein, the man in charge of public schools in New York City, lists other perverse incentives. States are rewarded for increasing the proportion of students who pass their exams, but not for raising a child's score from abysmal to nearly-good-enough-to-pass, or from just-passed to brilliant. So they are tempted to lavish attention on those on the cusp of passing, while neglecting both the weakest and the strongest students. ^[3]

Schools that respond to these incentives (and focus all their attention on those at the cusp of passing) in locations which allow easy switching of schools will tend to drive away the ignored students for whom the value of their education is not adequately captured by the Pass/Fail grade, as Gresham's Law predicts.

A case in education where Gresham's Law generally does not apply is with "diploma mills," schools that offer diplomas even to those with very low qualifications for a price. A diploma mill (also known as a degree mill) is an organization that awards Academic degrees and Diplomas with substandard or no academic study and without It may seem that according to Gresham's law these "bad" diplomas ought to drive out the "good" diplomas. However, unlike money, most countries have no law requiring employers to accept all diplomas as being of equal value. Each employer is free to assess the value of qualifications as they see fit. In those nations or governmental organizations where the law does require blindness, this effect does occur.

Gresham Law was famously used by the current portuguese president Cavaco Silva to depict the mediocrity in political recruitment, clearly hinting that the at the time prime-minister Santana Lopes (a conservative populist who replaced Durão Barroso, nominated president of the EU Commission) was "bad money", driving away the high-profile credible politicians (the "good money"). Background Santana Lopes was born in Lisbon, Campo Grande to Aníbal Luís Lopes ( Lisbon, São Sebastião da Pedreira February 17, 1933 José Manuel Durão Barroso (ʒuˈzɛ mɐnuˈɛɫ duˈɾɐ̃ũ bɐˈʁozu born 23 March 1956 is the 12th President of the European Commission. The European Commission (formally the Commission of the European Communities) is the executive branch of the European Union. After months of protests and instability, Santana Lopes was exonerated by president Jorge Sampaio, who called for a parliamentary election. Background Sampaio was born in Lisbon on 18 September 1939 The Sampaio family lived abroad in the United States and England for some years Santana's party, the PSD eventually lost to Jose Socrates's socialist party. José Sócrates Carvalho Pinto de Sousa, GCIH (ʒuˈzɛ ˈsɔkɾɐtɨʃ; born in Vilar de Maçada degree as a civil Technical engineer Cavaco Silva was elected President a year later.

See also

• Adages named after people

Notes

References

• Armitage, Angus, The World of Copernicus, New York, Mentor Books, 1951.
• Bush, Vannevar, (1950) Science, the Endless Frontier, Report from the Director of the OSRD to President H. Vannevar Bush ( March 11, 1890 &ndash June 30, 1974; pronounced "VAN-ee-var" ˈvæˌniː Truman
• Guidotti, P. E. , & Rodriguez, C. A. (1992). Dollarization in Latin America - Gresham law in reverse. International Monetary Fund Staff Papers, 39, 518-544.
• Rolnick, A. J. , & Weber, W. E. (1986). Gresham's law or Gresham's fallacy. Journal of Political Economy, 94, 185-199.
• Rothbard, M.N. (1980). Murray Newton Rothbard (March 2 1926 – January 7 1995 was an American economist of the Austrian School who helped define modern Libertarianism What Has Government Done to Our Money? Gresham's Law and Coinage [2]. What Has Government Done to Our Money? is a book by Murray N Rothbard that details the history of money from early Barter systems to the Gold Auburn AL, Ludwig von Mises Institute. The Ludwig von Mises Institute ( LvMI) based in Auburn Alabama, is a Libertarian academic organization engaged in research and scholarship in the fields
• Selgin, G. , University of Georgia (2003). Gresham's Law.
• Spiegel, Henry William (1991). The growth of economic thought, 3rd. ISBN 0-8223-0965-3.  
• Stokes, D. E. , (1997) Pasteur's Quadrant: Basic Science and Technological Innovation, Brookings Institution Press, Washington D. C.

External links

• An example of Gresham's Law.
• “Bad Money Drives Out Good”
• Coinflation.com--site illustrating Gresham's Law based upon the current metal value of coins in circulation

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