Gresham’s law, explained
Gresham’s law has historically influenced the circulation of currency and continues to impact economic behavior by addressing how individuals prioritize different forms of money.
Gresham’s law is a principle in economics that states that when two different forms of money are in circulation, individuals typically spend or trade the money they believe to be more valuable while hoarding or using the money they believe to be less valuable.
A common way to summarize this is “bad money drives out good.” Here, “good money” is defined as a currency that has greater intrinsic worth and is held onto, whereas “bad money” is defined as a currency that has a lower intrinsic value and people are eager to get rid of.
Although he didn’t originate the concept, Gresham’s law is named after Sir Thomas Gresham due to his role in popularizing the idea of how bad money drives out good money in monetary systems. He was a 16th-century English financier and adviser to Queen Elizabeth I.
Gresham’s law has historically been seen in a number of fiat currency systems, where debased or counterfeit coins would drive out of circulation the more valuable, legal coins because individuals would rather hold onto the higher-value currency and spend the lower-value currency. This idea is still relevant today when debating the use of cryptocurrencies and their differing levels of stability and utility.
