Gresham's Law or Gresham's Fallacy

Public
Creator Series Issue number
  • 088
Date Created
  • 1983-08
Abstract
  • The claim that bad money drives out good is one of the oldest and most cited in economics. Economists refer to this claim as Gresham’s law. Yet despite its seemingly universal acceptance, this claim does not warrant its status as a law. We find it has no convincing explanations and many overlooked exceptions. We propose an alternative hypothesis based on the costs of using a medium of exchange at a nonpar price: small-denomination currency undervalued at the mint tends to disappear from circulation while large-denomination currency usually circulates at premium. Examining a variety of historical episodes when market and legal prices were different, we find our “law” can explain history much better than Gresham’s.

Related information Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department
Publisher
  • Federal Reserve Bank of Minneapolis
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