Gresham's Law

   Gresham's law is based on the theory that if two currencies of the same nominal value but different intrinsic value are in circulation at the same time, the currency with the lower value will eventually drive out of circulation the money with the higher intrinsic value because people will hoard the good money.

   The simplest way of enunciating this principle is to say, "Bad money drives out good." The law stems from the fact that money has a value both as money and as a commodity in the open market. The former value is set arbitrarily by law, and is relatively fixed; the latter is determined by supply and demand and varies from time to time. "Good" money has a higher value as a commodity than as money and will disappear from circulation.

   The best example of the operation of the law occurs under a bimetallic system, such as the one adopted by the United States in 1792. Congress authorized a $10 gold eagle containing 247.50 grains and a silver dollar of 371.25 grains. At the mint, gold was worth $19.39 an ounce and silver $1.29 an ounce. By 1799, gold was worth $20.30 an ounce in foreign markets. The eagle therefore disappeared from circulation because holders could get almost $1 more an ounce in the market than at the mint.

   Henry D. Macleod, a Scottish economist, in 1857, attributed this law to Sir Thomas Gresham (1519—1579), even though Gresham had never stated it and possibly never understood it. In any event, Gresham promulgated it in 1558 to Queen Elizabeth. History has established that the same principle had been enunciated by Nicole Oresme about 1360 and more clearly by Nicolaus Copernicus in 1526.

   Gresham was a successful merchant and the founder of the Royal Exchange. He must have known something about money, for he was the financial adviser to four successive English sovereigns. Although Gresham may never have understood the "law," Gresham's law has, despite all the criticism addressed to him, survived, under his name, as an accepted economic principle.

   The expression to sup with Sir Thomas Gresham commemorates Gresham because he built the Royal Exchange, which had a public resting place (called a common lounge) for the homeless and for those who had no money to buy a meal. Therefore, to sup with Sir Thomas Gresham meant to go dinnerless.