What is Gresham's law?
The basic principle of Gresham's law is that bad money causes good money from circulation. In this context, good money is a change with considerable value: usually coins made of valuable metal, such as gold or silver. Bad money is a less valuable currency marked as a valuable ruler. According to Gresham's law, the economy containing both types of money will attract to bad currency. Say that you will fit in the bar and want to buy a cheap drink. It can use either a paper account or a silver coin. If it is economically rational, it uses an account and saves the coin because the coin retains its independent value. If the economy contains the potential of inflation, the coin will remain valuable due to the metal from which it is made. It is quite possible that the metal value exceeds the nominal value of the coin and creates motivate the coin and sell the material.
Gresham's law will enter into force only in the economies in which DominovAl monarch. There must be valuable coins and currency that is assigned a value. The monarch must have the power to promote the use of his artificial money called the Fiat currency. In an unregulated economy, accounts would be simply less valuable than coins; People would not be willing to accept them as substitutes. The state must be able, potentially, to violently intervene to guarantee its currency.
Another force that manages Greham's law is, in addition to inflation, the power of international trade. Even a highly effective government cannot artificially determine how the currency is traded on the international market. Thus, even if domestic agents are forced to accept good and poor currency, good currency will trade for more money in the market outside markets. As a result, in addition to being saved by individual actors, good money actively leaves the economy in which artificial equivalence is introduced.
The name of the law comes from Sir Thomas Gresham, who proposed this concept in 1558 in a letter to Queen Elizabeth. This nameIt was scored three hundred years later, in 1858, Henry Macleod. In fact, the idea of Gresham's law was known since antiquity. George Selgin, a modern economist who follows the history of the concept, quotes a reference to a similar idea in Aristophanes' frogs , which was written around 405 B.C.