Gresham’s Law, explained.
Gresham’s law describes the tendency for undervalued money to leave circulation when different monies must trade at a fixed legal valuation.
Why it happens
Equal face-value monies have commodity values 1.2 and 0.8. Spending divisible units on goods worth 0.6 preserves more commodity value when the low-metal money is spent; commodity-value pricing removes that difference.
Gresham’s law describes the tendency for undervalued money to leave circulation when different monies must trade at a fixed legal valuation.
Read the result
Both monies have equal legal face value only in the first regime. The commodity-pricing regime changes units required to buy the same goods.
A worked example
Spend low-valued money under fixed acceptance
Choose the equal-face-value rule and buy goods worth 0.6 using the low-metal money.
Compare retained commodity value 1.52 with 1.28 if the high-metal money is spent instead.
Switch to commodity-value pricing and inspect equal retained value 1.4 for either divisible payment.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Equal face-value monies have commodity values 1.2 and 0.8. Spending divisible units on goods worth 0.6 preserves more commodity value when the low-metal money is spent; commodity-value pricing removes that difference.
Where this idea is useful
A practical use
Identify the enforced exchange or acceptance rule before applying the phrase bad money drives out good.
A common misconception
“Gresham’s law says inferior products always defeat superior products.”
The monetary argument depends on a valuation or acceptance rule that overvalues one money relative to another, not a universal competitive-products claim.
What this explanation leaves out
- Divisibility and frictionless acceptance are teaching conveniences. No universal claim about inferior products, cryptocurrencies or freely floating monies follows from this scenario.
Why permit fractions of coins in the example?
Divisible units isolate the value accounting without denomination constraints; they are an explicit simplification rather than a historical transaction reconstruction.
What enforced valuation makes one form of money more attractive to spend than retain?
Associated thinkers
Associations marked provisional are awaiting source review.
Further reading
Explore the original research or the teaching reference behind this experiment.