Gresham's Law - Bad Money Drives Out Good

The Paradox

When two currencies have the same legal value but different intrinsic value, people hoard the good money and spend the bad money. The "good" money vanishes from circulation while "bad" money becomes all you see. Named after Sir Thomas Gresham (1519-1579), though Copernicus described it earlier in 1526.

G = Full-value gold/silver coin (worth $10 in metal) D = Debased coin (worth $6 in metal, but trades at $10)

Interactive Simulation

Year: 1965

Good Money

Debased Money

Good Money in Circulation

100%

Good Money Hoarded

Debased Money in Circulation

Transactions/Year

Historical Examples

1965 - United States

Silver Coins Vanish

When silver prices rose, the US switched to copper-nickel coins. Within 2 years, 90% of silver coins disappeared from circulation—melted down or hoarded. By 1970, virtually none remained.

1544-1551 - Tudor England

The Great Debasement

Henry VIII reduced silver content from 92.5% to just 25% to fund wars. Citizens hoarded old coins or melted them. Prices doubled as debased coins flooded markets.

1923 - Weimar Germany

Hyperinflation Reversal

When the Rentenmark replaced worthless Papiermarks, people spent old money instantly while hoarding the stable new currency—Thiers' Law, the reverse of Gresham's.

3rd Century - Roman Empire

Denarius Debasement

The silver denarius fell from 95% silver to under 5% over 200 years. Old coins vanished; only debased ones circulated. Eventually, the currency system collapsed.

Today - Modern Markets

Digital Age

Gresham's Law applies to crypto (spending weak coins, holding Bitcoin), gift cards (use soon-to-expire ones first), and even airline miles (spend before devaluation).

Why Does This Happen?

Rational self-interest: If you have two coins both legally worth $10, but one contains $10 of silver and the other only $5, which do you spend? Obviously the $5 one—you keep the full-value coin! Everyone does this, and good money disappears.

The Reverse (Thiers' Law): When bad money becomes worthless (hyperinflation), good money drives it out. People refuse to accept worthless currency, preferring stable alternatives like foreign currency or gold.

Key Insight: Gresham's Law only operates when exchange rates are fixed by law. With floating rates, bad money simply trades at a discount rather than driving out good money.