GRESHAM’S LAW: THE MONETARY CONFIDENCE GAME

In a world where two forms of money coexist, one depreciating in value while the other remains stable, Gresham’s Law dictates that people will naturally seek to spend the depreciating money while hoarding the good money. Sir Thomas Gresham (1517-1579), British financier and advisor to Queen Elizabeth I, penned the law: “Bad money drives out good.” This means that when given a choice, individuals will quickly dispose of the currency losing value and hold onto the one that maintains its purchasing power. The good money will be “driven out” of circulation.

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