Gresham's Law: Why Bad Money Drives Out Good, From Athens to Now

Got something to say to this podcast? Send a voicemail, and you might hear yourself on the next episode!

Given a crisp five dollar bill and a torn one, most people hand over the torn one. Gresham's law is that instinct at the scale of nations: when the law forces two unequal kinds of money to pass at the same face value, people spend the worse and hoard the better. This episode starts in Tudor England, where Henry VIII secretly replaced about 40 percent of the silver in English shillings to pay for his wars. Merchants noticed the duller look and lighter feel at once. Financial agent Thomas Gresham later warned Elizabeth I that the good coin had fled the realm.

Gresham did not name the law. Economist Henry Dunning Macleod attached his name to it in 1858, and others had described it far earlier, among them Copernicus in a 1519 treatise, the scholar Ibn Taymiyyah, and Aristophanes in The Frogs around 405 BC. The episode follows the pattern through the vanishing American silver half dollar, Isaac Newton's costly mispricing of gold at the Mint, and the reversal known as Thiers' law, when hyperinflation lets sellers refuse bad money outright. It ends with used cars, carbon offsets, and workplaces.

• After the Coinage Act of 1965 cut the half dollar from 90 percent to 40 percent silver, the older coins disappeared from circulation. The cycle repeated when silver was removed entirely in 1971.
• In 1717 Newton, as Master of the Mint, set the gold guinea at 21 silver shillings, overvaluing gold. Merchants carried silver abroad and Britain slid onto a de facto gold standard.
• Aristophanes compared Athenians passing silver-plated bronze over their good old coin to a city promoting corrupt politicians over upright ones.
• Thiers' law, popularized by economist Peter Bernholz, describes the breaking point seen in Weimar Germany in 1923 and Zimbabwe in 2009, when people abandon worthless currency for money that holds value.
• In the used car market, buyers who cannot tell a good car from a lemon offer only an average price, so owners of well-kept cars withdraw them and the lemons take over.