Gresham's Law

Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." It is commonly stated as: "Bad money drives out good", but is more accurately stated: "Bad money drives out good if their exchange rate is set by law."

This law applies specifically when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions. The artificially overvalued money tends to drive an artificially undervalued money out of circulation and is a consequence of price control.

Gresham's law is named after Sir Thomas Gresham (1519–1579), who was an English financier during the Tudor dynasty. However, the law had been stated forty years earlier by Nicolaus Copernicus. In Poland it is known as the Copernicus–Gresham Law. The phenomenon had been noted even earlier, in the 14th century, by Nicole Oresme. This notion was developed also during the time of the Mamluk Empire. Specifically, it was developed by the Muslim jurist and historian Al-Maqrizi (1364–1442) who wrote about a particular period in the Mamluk dynasty when the rulers were simultaneously increasing the supply of a lower valued (copper) currency and hoarding the more valued (gold and silver) currencies. This can be found in his work titled "Study of the Monetary System." The fact of bad money being used in preference to good money is also noted by Aristophanes in his play The Frogs, which dates from around the end of the 5th century BC.