Business, Legal & Accounting Glossary
Gresham’s Law is a law used in monetary economics generated by English businessman Sir Thomas Gresham that states, “Bad money drives good money out of circulation”. In order to understand Gresham’s Law, one must have clear ideas on “bad money” and “good money”. “Bad money” is referred to as money that possesses considerable dissimilarity between its commodity value and its market value. Market value is generally inferior to exchange value or in another way actual value is lesser than market value.
In days when Gresham’s Law was introduced, bad money referred to the type of coin that can be categorized as “debased”. Debasement is corrosion of value of metal from any coin, which happens due to regular cutting or scraping of coins. These “debased” coins have less market value. If any coin is debased by government, the market value of that coin is decreased openly, but exchange value is held much higher by passing legal tender laws. Gresham’s Law is mainly applied to commodity money, so all modern money can be termed as “bad money” since only fiat money is used in today’s economy.
“Good money” refers to that type of money, which has a very minimal difference between its nominal value and its commodity value. The nominal value is the face value of coin and commodity value refers to actual price at which coins are exchanged.
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This glossary post was last updated: 27th March, 2020 | 8 Views.