Gresham's Law

Gresham’s Law is an economic principle summed up by the phrase: “bad money drives out good.” When two types of money circulate together, people tend to spend the currency that’s losing value—“bad” money—and hold onto the currency that’s more stable—“good” money. As a result, inferior money becomes more common in everyday transactions, while higher-quality money is largely saved or hoarded.

Consider a scenario where someone owns both U.S. dollars and bitcoin. They’re more likely to spend the dollars, which frequently lose purchasing power due to inflation, and save their bitcoin, hoping it will maintain or increase in value over time. This behavior partly explains why bitcoin is more popular as a store of value than as a day-to-day payment method.

Gresham’s Law often comes into play when governments set the official value of money, such as through legal tender laws or fixed exchange rates. A key example occurred in 1965, when the U.S. reduced the silver content in half-dollar coins. Even though both old and new coins were legally valued the same, people quickly withdrew the more valuable 90% silver coins from circulation, melting or exporting them, leaving behind the less valuable versions.

Sir Thomas Gresham described this effect in 1558, warning that debased coins drove real gold out of England. When authorities manipulate the supply or value of money—like Henry VIII did by lowering the silver content in England’s coins—the more valuable currency often disappears from domestic use, weakening the economy with lower-quality money in daily life.