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Gresham's Law

  Gresham\'s law was named after Sir Thomas Gresham, master of the mint in England under Queen Elizabeth I in the 16th century. Basically, the law is that bad money drives out good. When more than one kind of money is in circulation (for example, gold and silver coins), the money which is overvalued at the official price will tend to remain in circulation because it is worth more as a medium of exchange than as bullion in the market. The money which is undervalued will disappear from circulation to be hoarded or to be melted down because it has higher value as metal than as legal tender. The undervalued coins might also disappear from domestic circulation by being used for foreign payments, where the higher market value (relative to the domestic legal tender value) would be effective.

‘Bad’ money may also be paper money in which people have little confidence because too much is issued at a time of inflation. If it is legal tender, people will pay it out as they receive it, while hoarding coins of intrinsic value (‘good’ money) that they receive. Before the US Civil War, private bank notes were not legal tender, but Gresham\'s Law applied as people kept the bank notes of reputable banks and tried to spend the bank notes of more obscure banks. TF

See also bimetallism.



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