Gresham's Law: Difference between revisions
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==External links== | ==External links== | ||
* [[Wikipedia:Gresham's Law|Gresham's Law]] on Wikipedia | * [[Wikipedia:Gresham's Law|Gresham's Law]] on Wikipedia | ||
* [[Wikipedia:Monetae cudendae ratio|Monetae cudendae ratio]] | * [[Wikipedia:Monetae cudendae ratio|Monetae cudendae ratio]] a paper on coinage by [[Wikipedia:Nicolaus Copernicus|Nicolaus Copernicus]] | ||
* [http://mises.org/money/3s5.asp What Has Government Done to Our Money?] by [[Murray Rothbard]] | * [http://mises.org/money/3s5.asp What Has Government Done to Our Money?] by [[Murray Rothbard]] | ||
* [http://eh.net/encyclopedia/article/selgin.gresham.law Gresham's Law] by George Selgin | |||
[[Category:Economical Concepts]] | [[Category:Economical Concepts]] | ||
Revision as of 21:46, 5 August 2009
Gresham's Law states, that an overvalued money will drive undervalued money out of the market. Or more simply, "bad money drives out good".[1]
How It Works
Gresham's Law comes into play, when several types of money have a conversion ratio specified by legal tender laws, different from their market price.
For example, let's say the law sets the ratio at 20 ounces of silver for one ounce of gold; but the market price is 15. Any contract or debt in silver can be now paid in gold. So instead of expending 20 silver, the debtor will buy an ounce of gold for 15. As a result, no one will be willing to enter a contract quoted in silver.
The undervalued money will vanish from the market, bringing down prices quoted in it. Those still using it will likely find themselves in trouble, because they made debts and investments under the old price level and expected their incomes to be correspondingly higher. The 'good money' will be held by the users of money, or sold into other countries, where the local laws do not apply. This exchange of currencies takes time, while the supply of money shrinks. This produces a temporary deflationary effect.[1]
History
The law was named after Sir Thomas Gresham, a sixteenth century financial agent of the English Crown in the city of Antwerp, to explain to Queen Elizabeth I what was happening to the English shilling. Her father, Henry VIII, has replaced 40 percent of the silver in the coin with base metals, to increase the government’s income without raising taxes. Astute English merchants and even ordinary subjects would save the good shillings from pure silver and circulate the bad ones; hence, the bad money would be used whenever possible, and the good coinage would be saved and disappear from circulation.[2]
But it was known long before, for example, in Aristophanes’s poem "The Frogs"[1] and in the Treatise of Nicholas Oresme, which also pointed out the deflationary impact.[3]
References
- ↑ 1.0 1.1 1.2 Jörg Guido Hülsmann. "1. Fiat Equivalence and Gresham's Law" (pdf), Ethics of Money Production, p.126-127, referenced 2009-07-01.
- ↑ Charles Adams. "Bad Money Drives Out Good", The Future of Freedom Foundation, referenced 2009-07-01.
- ↑ Nicholas Oresme. "The De Moneta of Nicholas Oresme and English Mint Documents" (pdf), London: Thomas Nelson and Sons, 1956, p. 32., referenced 2009-07-01. "Again, such alterations and debasements diminish the amount of gold and silver in the realm, since these metals, despite any embargo, are carried abroad, where they command a higher value. For men try to take their money to the places where they believe it to be worth most. And this reduces the material for money in the realm."
External links
- Gresham's Law on Wikipedia
- Monetae cudendae ratio a paper on coinage by Nicolaus Copernicus
- What Has Government Done to Our Money? by Murray Rothbard
- Gresham's Law by George Selgin