“Bad Money Drives Out Good Money”
There are some hills we’re willing to die on; this is one of mine:
“Gresham’s Law” is one long game of telephone/Chinese whispers up and down the centuries of monetary writing.
And a pretty trivial one at that.
Sir Thomas didn't create an economic law. He didn’t even discover a tendency about fixed-rate commodity monies that apply under certain very important conditions: He’s almost entirely innocent to this creation, the blame of which lay with Henry Dunning MacLeod some 300yrs later.
Indeed, all poor Gresham did – while negotiating the Crown’s foreign debts in Antwerp, the financial center of the day – was to point out to Queen Elizabeth in the monetary turmoil after Henry VIII’s debasements, that after the unfavorable (read: arbitrage-worthy) exchange rate based on the coin’s metallic content:
“all your fine goold was convayd ought of this your realme.” (https://archive.org/details/lifetimesofsirth01burguoft)
Kind of hard to derive monetary competition or a structural law favoring the equilibrium of "bad"/poor/cheap/inflated/fiat money from that.
Gresham's law is not a feature of economics or the market economy, the way for instance the Law of Demand or the Law of One Price is. Gresham's law is an outcome of artificial/institutional interventions -- usually a government mandating that two different monies have the same value. The supposed law (=price fixing), where "bad" money wins out, ONLY happens when an entity fixes two things at a given price, and that that price is different from the (world) market price.
But that makes it, per Joseph Schumpeter, trivial. Yes, if I hold two different monies that, per relative prices, have the same value, and a store is offering me 10% cheaper prices if I pay with one of those monies, of course I will use that one.
Here's Robert Mundell, Nobel Laureate, in a journal article from the 1990s:
“The motivating force underlying Gresham's Law is economy: we settle a debt or transaction with the cheapest means of payment. But that is what money is! In the world of exchange, debts are settled in the cheapest medium possible.” (https://www.usagold.com/greshamslaw-mundell/)
So, there is no law of nature/economics that favors inferior fiat money over pristine bitcoin money.
If anything, monies that in the past have overtaken rivals and had lasting power usually did so because they were STRONG, supplanting weak or inflating ones: Persian daric, Roman denarius, florins of 15th-C Italian city states, Spanish pieces of eight etc. Quoting Mundell again:
“The pound sterling in the 19th century and the dollar in the 20th century did not become the dominant currencies of their time because they were weak."
Bad money doesn’t drive out good money any more than bad cars drive(!) out good cars. What happens in a free market is competition; goods compete at different price points. "Bad" cars trade at lower prices than "good" cars.
Gresham-type considerations only come into play when some institutional feature mandates acceptance at a non-market price (or there are severe punishments for using the overvalued money).
Lyn Alden, bless her soul, makes this error too:
That is fine as a general statement, and collapses down to an assertion that consumers prefer cheaper over more expensive goods -- it's more expensive to use bitcoin, not because of transaction costs (Visa/MC probably more expensive than Lightning) but because using bitcoin saddles the holder with capital gains tax and reporting requirements.
But that’s the Law of Demand, not Gresham.
Besides – and this is a very important point for invoking Gresham in our modern monetary times – THERE IS NO FIXED EXCHANGE RATE BETWEEN BITCOIN AND FIAT. If no fixed rate, no Gresham.

So, next time you hear a Bitcoiner invoke Gresham’s law for some modern monetary reason, think back to this MONEY LESSON ... and, politely, ask them to go screw themselves.
That's today's little money lesson. Peace, J
Fixed exchange rates are a problem.
Bretton Woods agreement created fixed exchange rates until 1971 when Nixon removed link between gold and dollars.
Tobacco used to be currency in North Carolina. Bad or counterfeit tobacco was inflationary because people held on to the good tobacco
@siggy47 has a personal story from childhood about Gresham
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I can't find @siggy47 comment... if I recall correctly: his dad saved the 'expensive' pennies or nickels dimes and quarters
Prior to 1965 dimes and quarters were made of 90 percent silver and 10 percent nickel but with the Coinage Act of 1965 the silver content was removed and replaced with 75 percent copper and 25 percent nickel. Almost immediately the high intrinsic value dimes and quarters began to be hoarded as Gresham’s Law kicked in. Today a pre-1965 silver dime is worth about $2.40 in inflated Federal Reserve Notes.
We should stop creating more pennies or replacing lost pennies.
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Yes. You are correct. As a little kid my dad had me go through his drug store's cash register to pull out the silver dimes and quarters to bring home. He kept the new stuff in the register for change. I could spot the old coins because they didn't have the thin, brown line on the rim caused by some alloy. I still have those old bags somewhere.
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Ok but given the Alden example it seems like a fairly subtle somewhat technocratic or academic distinction.
In common parlance what people are usually saying is Bitcoin is better to hold than fiat over time.
Even if spending Bitcoin did not incur tax liabilities surely I would still logically prefer to spend fiat which is constantly debasing than Bitcoin which tends to appreciate?
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agreed, but we're still not in Gresham's law territory then -- it's all just monetary competition and how to optimize your balance sheet across asset classes. Gresham's law, as I explained, only holds under fixed regimes presenting arbitrage opportunities.
Put differently, do you think there's somebody upholding a fixed BTC/USD rate that we can all Gresham off?
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No and hopefully never will be, but if they ever impose an E.O.6102฿ there might well be a fixed price set for the acquisition!
My point remains that for the average punter Bitcoin is harder money, better for saving/hoarding than fiat and so they will use fiat to buy it and dispose of fiat as quickly as possible for consumption...and they will (mis)use Greshams Law as shorthand to express that. You are probably right to critique that use as it not technically correct, but people will always tend to take shortcuts.
There is also however as you mentioned, considerable market distortion caused by the arbitrary designation of Bitcoin as a commodity resulting in tax assessment and payment obligations which hugely obstructs use of Bitcoin a payments protocol.
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41 sats \ 9 replies \ @jk_14 24 Oct
side note 1: There is no such thing as Gresham's Law... The proper name is: Copernicus' Law #128857
side note 2: Of course there is Copernicus' Law or more precisely: Copernicus' Law effect “Bad Money Drives Out Good Money” - at payments, simply because: “Good Money Drives Out Bad Money” - in hoarding, which is for ppl more important thing. That's the reason where this whole mess is from. Simple as that.
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nah, neither drives out any. Consumers (=money holders) compete on several different margins, no specific direction
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nah, I will prove to you in a very simple way that I am right, and you are wrong...
  1. I will borrow from you two ten-dollar banknotes
  2. I will partially tender one of them on the edge
  3. I will give you both banknotes back and ask you to buy, e.g. a hot-dog on the street
And which bill will you prefer to get rid of and which one to keep? I (and most of people) would definitely try to get rid of the Bad Money and keep the Good Money (yes, exactly according to Copernicus' Law)
Whole this topic is as easy as building a flail, in fact. Let's not overcomplicate such simple things, please... :)
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well, no. Would depend on at least three things:
  1. how picky the lender (i.e., me) am about the quality of the note returned to me
  2. how picky the hot-dog merchant is about the quality of the note returned to me
  3. what legal/institutional frameworks surrounds it, i.e., do you go to jail (STRAIGHT TO JAIL!) for peddling a torn note? Are they fiat notes with no use that the Fed replaces for banks when they're broken?
These questions are the point of the surprisingly annoying econ literature on Gresham. Trace it to whoever, but I agree with you that it's a trivial version of the Law of Demand/One Price.
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as I wrote already, don't overcomplicate simple things...
  1. let's assume you realized that one of banknotes is bad - after I left your office
  2. let's assume hot-dog merchant will do the most obvious thing - try to do the same, i.e. get rid of it - and in worst case he will need to replace too much used banknots by the way of being in his bank)
and if you wish, we can change this situation for: I give you two not torn banknotes, but one is very used and another looks like brand new.
Let's not overcomplicate simple things, like: natural human behaviour
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it becomes a gamble, an entrepreneurial foresight, where you, me, or merchants need to have some projection about likelihood to pass off the bad note. (similar to bitcoin and dollars, for instance, provided the notes could come with discounts).
If I, or the merchant, would rather play it safe -- torn note is broke/fake/possible won't be accepted by the next guy -- they'd opt for the good note or maybe even decline the trade altogether.
that's the opposite of Gresham's law
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torn note is broke/fake/possible won't be accepted by the next guy
I wrote about it above already... Then, for simplicity: one banknot is acceptable for everyone, but significantly used second one is like a brand new
and almost everyone will rid of the first one, what is exactly effect of Copernicus' Law, and what is in fact plain, natural human behaviour
(and this is by no means Gresham's Law, simply because Thomas Gresham in A.D. 1526 was a kid or not even born yet)
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Nono, you're missing my point -- and what I think a lot of the Rolnick/Mundell/Selgin debacles was about:
everyone will try to spend the used one, and keep the high-quality one. But the merchant is in the exact same position, with incentives reversed. He would want the brand new one, not the significantly used one.
So there's a negotiation going on, naturally leading to some kind of price discovery (pay premium/discount for pristine quality etc).
The weird think you discuss is when some entity FORCES everyone to accept the two notes at par. (insert good car/bad car analogy)
P.S. tear, not tender :)
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Using your car example, if for some reason I owed you an unspecified car, then clearly I'm going to give you the worst car I own.
There's nothing more here than a basic application of marginal utility theory.
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agreed (or at least if we add in subjective value) -- which is why the entire naming-of-a-law or calling them tendencies for one type to drive out another is silly.
There is no Gresham. It's just law of demand
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10 sats \ 0 replies \ @kruw 25 Oct
I love this kind of vindictive correction of an otherwise harmless myth.
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How dare you cast shade on the great Lyn Alden!
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yea, unbelievable really. But it was a few years ago she said that; maybe she changed her mind?
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we can hope
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@lynaldencontact might tell us ;)
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