Gresham's law
is an economic principle that states: "When a government 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".
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 artificially undervalued money out of
circulation and is a consequence of price control.
The
law was named in 1858 by Henry Dunning Macleod, after Sir Thomas
Gresham (1519–1579), who was an English financier during the Tudor
dynasty. However, there are numerous predecessors. The law had been
stated earlier by Nicolaus Copernicus; for this reason, it is
occasionally known as the Copernicus Law.
It was also stated in the 14th century, by Nicole Oresme, and by jurist
and historian Al-Maqrizi (1364–1442) in the Mamluk Empire; and noted by
Aristophanes in his play The Frogs, which dates from around the end of the 5th century BC.
