FACTOID # 7: The top five best educated states are all in the Northeast.
 
 Home   Encyclopedia   Statistics   States A-Z   Flags   Maps   FAQ   About 
   
 
WHAT'S NEW
 

SEARCH ALL

FACTS & STATISTICS    Advanced view

Search encyclopedia, statistics and forums:

 

 

(* = Graphable)

 

 


Encyclopedia > Gresham's law

Gresham's law is commonly stated as: "When there is a legal tender currency, bad money drives good money out of circulation". or more accurately "Money overvalued by the State will drive money undervalued by the State out of circulation." Legal tender or forced tender is payment that cannot be refused in settlement of a debt denominated in the same currency by virtue of law. ... Various denominations of currency, one form of money Money is any good or token that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. ...


Gresham's law applies specifically when there are two forms of commodity money in circulation which are forced, by the application of legal tender laws, to be respected as having the same face value in the marketplace. It is named after Sir Thomas Gresham, an English financier in Tudor times. Commodity money is money whose value comes from a commodity out of which it is made. ... Legal tender or forced tender is payment that cannot be refused in settlement of a debt denominated in the same currency by virtue of law. ... Portrait by Anthonis Mor, c. ... Financier (IPA: /ˌfi nãn ˈsjei/) is an elegant term for a person who handles large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. ... The Tudor dynasty or House of Tudor (Welsh: ) was a series of five monarchs who ruled England and Ireland from 1485 until 1603. ...

Contents

Definitions of "good money" and "bad money"

The terms "good" and "bad" money are used in a technical sense, and with regard to exchange values imposed by legal tender legislation, as follows:


Good money

Good money is money that has little difference between its exchange value and its commodity value. In the original discussions of Gresham's law, money was conceived of entirely as metallic coins, so the commodity value is the market value of the coined bullion of which the coins are made. In Marxian political economy, exchange value refers to one of three major aspects of a commodity, i. ... In the field of economics, the commodity value of a good is its free market intrinsic value under optimal use conditions. ...


An example is the US dollar, which, prior to the 1900s was equal to 1/20.67 ounce (1.5048 g) of gold, and carried an exchange value roughly equal to its coined gold market value. The United States dollar is the official currency of the United States. ... The ounce (abbreviation: oz) is the name of a unit of mass in a number of different systems, including various systems of mass that form part of English units, Imperial units, and United States customary units. ... General Name, Symbol, Number gold, Au, 79 Chemical series transition metals Group, Period, Block 11, 6, d Appearance metallic yellow Standard atomic weight 196. ...


In the absence of legal tender laws, metal coin money will freely exchange at somewhat above bullion market value. (This is not a purely theoretical result, but rather can be observed today in bullion coins such as the Krugerrand (South Africa) and the American Gold Eagle (United States)). Coined money is of a known purity, and in a convenient form to handle. People prefer trading in coins to anonymous hunks of bullion, so they attribute more value to the coins. There is also a certain demand by coin collectors. Thus, coining is frequently profitable. Legal tender or forced tender is payment that cannot be refused in settlement of a debt denominated in the same currency by virtue of law. ... This article does not cite any references or sources. ... The American Gold Eagle is the official bullion gold coin of the United States. ... Seigniorage, also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency. ...


Bad money

Bad money is money that has a substantial difference between its commodity value and its market value, where market value is lower than exchange value.


In Gresham's day, bad money included any coin that had been "debased." Debasement was often done by members of the public, cutting or scraping off some of the metal. Coinage could also be debased by the issuing body, whereby less than the officially mandated amount of precious metal is contained in an issue of coinage, usually by alloying it with base metal. Other examples of "bad" money include counterfeit coins made from base metal. In all of these examples, the market value was the supposed value of the coin in the market. This article does not cite any references or sources. ... It has been suggested that Properties and uses of metals be merged into this article or section. ... An alloy is a homogeneous mixture of two or more elements, at least one of which is a metal, and where the resulting material has metallic properties. ... For other uses, see Counterfeit (disambiguation). ...


In the case of clipped, scraped or counterfeit coins, the market value has been reduced by fraud, while the exchange value remains at the higher value. On the other hand, with coinage debased by a government issuer the market value of the coinage was often reduced quite openly, but the exchange value of the debased coins was held at the higher level by legal tender laws.


All modern money is "bad money" in this sense, since fiat money has entirely replaced the commodity money to which Gresham's law applies. The ubiquity of fiat money could indeed be taken as evidence for the truth of Gresham's law. Fiat money or fiat currency, is money that is current or legal tender as satisfaction for money debts by government fiat, that is by law. ...


Theory

Gresham's law says that any circulating currency consisting of both "good" and "bad" money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the "bad" money. This is because people spending money will hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for themselves.


Consider a customer purchasing an item which costs five pence, who has in their possession several silver sixpence coins. Some of these coins are more debased, while others are less so — but legally, they are all mandated to be of equal value. The customer would prefer to retain the better coins, and so offers the shopkeeper the most debased one. In turn, the shopkeeper must give one penny in change — and has every reason to give the most debased penny. Thus, the coins that circulate in the transaction will tend to be of the most debased sort available to the parties.


If "good" coins have a face value below that of their metallic content, individuals may be motivated to melt them down and sell the metal for its higher bullion value, even if such defacement is illegal. For an example of this, consider the 1965 US Half-dollars which were made from only 40% silver. The previous year the half-dollar was 90% silver. With the release of the 1965 half, which was legally required to be accepted at the same value as the previous year's 90% halves, the older 90% silver coinage of the US quickly disappeared from circulation, and the debased money was allowed to circulate in its stead. As the price of bullion silver rose above the face value of the coins, many of those old half-dollars were melted down. With the 1971 issue the government gave up on including any silver in the half dollars. A similar situation is currently (2007) occurring with the rising price of zinc and copper, and has led to attempts by the U.S. government to ban the melting or mass exportation of one and five cent coins, respectively. The Half Dollar of the United States has been produced nearly every year since the inception of the United States Mint in 1793. ... General Name, Symbol, Number silver, Ag, 47 Chemical series transition metals Group, Period, Block 11, 5, d Appearance lustrous white metal Standard atomic weight 107. ... General Name, Symbol, Number zinc, Zn, 30 Chemical series transition metals Group, Period, Block 12, 4, d Appearance bluish pale gray Standard atomic weight 65. ... General Name, Symbol, Number copper, Cu, 29 Chemical series transition metals Group, Period, Block 11, 4, d Appearance metallic pinkish red Standard atomic weight 63. ...


In addition to being melted down for its bullion value, money that is considered to be "good" tends to leave an economy through international trade. International traders are not bound by legal tender laws the way citizens of the country are, so they will offer higher value for good coins than bad ones, and thus higher value than can be obtained within the country. The good coins may leave their country of origin to become part of international trade. Thus, the good money is driven out of the country of issue, escaping that country's legal tender laws and leaving the "bad" money behind. This occurred in Britain during the period of the Gold Exchange Standard. This article is on the monetary principle. ...


History of the concept

According to George Selgin in his paper "Gresham's Law":

As for Gresham himself, he observed "that good and bad coin cannot circulate together" in a letter written to Queen Elizabeth on the occasion of her accession in 1558. The statement was part of Gresham's explanation for the "unexampled state of badness" England's coinage had been left in following the "Great Debasements" of Henry VIII and Edward VI, which reduced the metallic value of English silver coins to a small fraction of what that value had been at the time of Henry VII. It was owing to these debasements, Gresham observed to the Queen, that "all your ffine goold was convayd ought of this your realm."

Gresham made his observations of good and bad money while in the service of Queen Elizabeth, with respect only to the observed poor quality of the British coinage. The previous monarchs, Henry VIII and Edward VI, forced the people to accept debased coinage by means of their legal tender laws. Gresham also made his comparison of good and bad money where the precious metal in the money was the same. He did not compare silver to gold, or gold to paper. Elizabeth I redirects here. ... Henry VIII (28 June 1491 – 28 January 1547) was King of England and Lord of Ireland, later King of Ireland, from 22 April 1509 until his death. ... Edward VI (12 October 1537 – 6 July 1553) became King of England, King of France (in practice only the town and surrounding district of Calais) and Ireland on 28 January 1547, and crowned on 20 February, at just nine years of age. ... Henry VII (January 28, 1457 – April 21, 1509), King of England, Lord of Ireland (August 22, 1485 – April 21, 1509), was the founder and first patriarch of the Tudor dynasty. ...


A form of Gresham's Law was described by Nicolaus Copernicus in the treatise Monetae cudendae ratio, in the year (1519) that Thomas Gresham was born. “Copernicus” redirects here. ...


Origin of the title

George Selgin in his paper "Gresham's Law" offers the following comments: Brief Bio George A. Selgin, PhD is a professor of Economics in the Terry College of Business at the University of Georgia. ...

The expression "Gresham's Law" dates back only to 1858, when British economist Henry Dunning Macleod (1858, p. 476–8) decided to name the tendency for bad money to drive good money out of circulation after Sir Thomas Gresham (1519–1579). However, references to such a tendency, sometimes accompanied by discussion of conditions promoting it, occur in various medieval writings, most notably Nicholas Oresme's (c. 1357) Treatise on money. The concept can be traced to ancient works, including Aristophanes' The Frogs, where the prevalence of bad politicians is attributed to forces similar to those favoring bad money over good.

The passage from The Frogs referred to is as follows; it is usually dated at 405 B.C.: Sketch of Aristophanes Aristophanes (Greek: , ca. ... Greek Wikisource has original text related to this article: The Frogs Frogs (Βάτραχοι (Bátrachoi)) is a comedy written by the Ancient Greek playwright Aristophanes. ...

The course our city runs is the same towards men and money.
She has true and worthy sons.
She has fine new gold and ancient silver,
coins untouched with alloys, gold or silver,
each well minted, tested each and ringing clear.
Yet we never use them!
Others pass from hand to hand,
sorry brass just struck last week and branded with a wretched brand.
So with men we know for upright, blameless lives and noble names.
These we spurn for men of brass....

Gresham's law in reverse

In an influential theoretical article, Rolnick and Weber (1986) argued that bad money would drive good money to a premium rather than driving it out of circulation. However their research did not take into account the context in which Gresham made his observation. Rolnick and Weber ignored the influence of legal tender legislation which requires people to accept both good and bad money as if they were of equal value. They also focused mainly on the interaction between different metallic moneys, comparing the relative "goodness" of silver to that of gold, which is not what Gresham was speaking of.


The experiences of dollarization in countries with weak economies and currencies (for example Israel in the 1980s, Eastern Europe and countries in the period immediately after the collapse of the Soviet bloc, or South American countries throughout the late twentieth and early twenty-first century) may be seen as Gresham's Law operating in its reverse form (Guidotti & Rodriguez, 1992), since in general the dollar has not been legal tender in such situations, and in some cases its use has been illegal. Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. ... Pre-1989 division between the West (grey) and Eastern Bloc (orange) superimposed on current national boundaries: Russia (dark orange), other countries of the former USSR (medium orange),members of the Warsaw pact (light orange), and other former Communist regimes not aligned with Moscow (lightest orange). ... A map of the Eastern Bloc 1948-1989. ... South America South America is a continent crossed by the equator, with most of its area in the Southern Hemisphere. ... (19th century - 20th century - 21st century - more centuries) Decades: 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s The 20th century lasted from 1901 to 2000 in the Gregorian calendar (often from (1900 to 1999 in common usage). ...


These examples show that in the absence of legal tender laws, Gresham's law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. However, if not given the choice, and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession, and pass on the bad money to someone else. Said in another way, in the absence of legal tender laws, the seller will not accept anything but money of real worth (good money), while the existence of legal tender laws will force the seller to accept money with no commodity value (bad money). Thus, the buyer will always try to spend his bad money first, but in the absence of legal tender laws, the seller will not accept money with no real worth.


Gresham's law in other fields

The principles of Gresham's Law can sometimes be applied to different fields of study. Gresham's Law generally speaks to any circumstance in which the "true" value of something is markedly different from the value people must accept, due to factors such as lack of information or governmental decree.


In the market for second hand cars, lemon automobiles (analogous to bad currency) will drive out the good cars. The problem is one of asymmetry of information. Sellers have a strong financial incentive to pass all cars off as "good" cars, especially lemons. This makes it chancy to buy a good car at a fair price, as the buyer risks overpaying for a lemon. The result is that buyers will only pay the fair price of a lemon, so at least they won't be ripped off. High quality cars tend to be pushed out of the market, because there is no good way to establish that they really are worth more. The Market for Lemons is a work that examines this problem in more detail. The Market for Lemons: Quality Uncertainty and the Market Mechanism is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. ...


Gresham's Law poses a similar trap in education.[1] For instance, The Economist, writing on the No Child Left Behind act's effect on U.S. schools, said: The Economist is a weekly news and international affairs publication owned by The Economist Newspaper Ltd and edited in London, UK. It has been in continuous publication since September 1843. ... Signing ceremony at Hamilton High School in Hamilton, Ohio. ...

Joel Klein, the man in charge of public schools in New York City, lists other perverse incentives. States are rewarded for increasing the proportion of students who pass their exams, but not for raising a child's score from abysmal to nearly-good-enough-to-pass, or from just-passed to brilliant. So they are tempted to lavish attention on those on the cusp of passing, while neglecting both the weakest and the strongest students.[2]

Schools that respond to these incentives (and focus all their attention on those at the cusp of passing) in locations which allow easy switching of schools will tend to drive away the ignored students for whom the value of their education is not adequately captured by the Pass/Fail grade, as Gresham's Law predicts.


A case in education where Gresham's Law generally does not apply is with "diploma mills," schools that offer diplomas even to those with very low qualifications for a price. It may seem that according to Gresham's law these "bad" diplomas ought to drive out the "good" diplomas. However, unlike money, most countries have no law requiring employers to accept all diplomas as being of equal value. Each employer is free to assess the value of qualifications as they see fit. In those nations or governmental organizations where the law does require blindness, this effect does occur. A diploma mill (also known as a degree mill) is an organization which awards academic degrees and diplomas with little or no academic study, and without recognition by official bodies. ...


References

  • Armitage, Angus, The World of Copernicus, New York, Mentor Books, 1951, pp. 89-91 (chapter 24: The Diseases of Money). Copernicus made notes on "Gresham's [Copernicus'?] Law" in 1519, presented a report on it to a 1522 diet, and drew up an enlarged, Latin-language version of his treatise, setting forth a general theory of money, for the 1528 diet.
  • Bush, V., (1950) Science, the Endless Frontier, Report from the Director of the OSRD to President H. Truman
  • Guidotti, P. E., & Rodriguez, C. A. (1992). Dollarization in Latin America - Gresham law in reverse. International Monetary Fund Staff Papers, 39, 518-544.
  • Rolnick, A. J., & Weber, W. E. (1986). Gresham's law or Gresham's fallacy. Journal of Political Economy, 94, 185-199.
  • Rothbard, M.N. (1980). What Has Government Done to Our Money? Gresham's Law and Coinage [1]. Auburn AL, Ludwig von Mises Institute.
  • Selgin, G., University of Georgia (2003). Gresham's Law.
  • Spiegel, Henry William (1991). The growth of economic thought, 3rd. ISBN 0-8223-0965-3. 
  • Stokes, D.E., (1997) Pasteur's Quadrant: Basic Science and Technological Innovation, Brookings Institution Press, Washington D.C.

“Copernicus” redirects here. ... Portrait by Anthonis Mor, c. ... Murray Newton Rothbard (March 2, 1926 – January 7, 1995) was an influential American economist, historian and natural law theorist belonging to the Austrian School of Economics who helped define modern libertarianism. ... What Has Government Done to Our Money? is a book by Murray N. Rothbard that details the history of money, from early barter systems, to the gold standard, to present day systems of paper money. ... Ludwig von Mises Institute for Austrian Economics, Auburn, Alabama The Ludwig von Mises Institute (LvMI), based in Auburn, Alabama, is a libertarian academic organisation engaged in research and scholarship in the fields of economics, philosophy and political economy. ...

Notes

  1. ^ [1]Dochy, F. (2001). A new assessment era: Different needs, new challenges. Research Dialogue in Learning and Instruction 2, 11-20.
  2. ^ Staff. "What chance co-operation?", The Economist, 2007-02-27. Retrieved on 2007-03-21. 

The Economist is a weekly news and international affairs publication owned by The Economist Newspaper Ltd and edited in London, UK. It has been in continuous publication since September 1843. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... March 21 is the 80th day of the year (81st in leap years) in the Gregorian calendar. ...

See also

This is a list of adages named after people (eponymous adages). ...

External links

  • An example of Gresham's Law.

  Results from FactBites:
 
Gresham's Law - Wikipedia, the free encyclopedia (2071 words)
Gresham's law is commonly stated as: "When there is a legal tender currency, this bad money drives good money out of circulation".
Gresham's law applies specifically when there are two forms of commodity money in circulation which are forced, by the application of legal tender laws, to be respected as having the same face value in the marketplace.
Gresham's law says that any circulating currency consisting of both "good" and "bad" money, where both forms are required to be accepted at equal value under legal tender law, quickly becomes dominated by the "bad" money.
  More results at FactBites »

 
 

COMMENTARY     


Share your thoughts, questions and commentary here
Your name
Your comments

Want to know more?
Search encyclopedia, statistics and forums:

 


Press Releases |  Feeds | Contact
The Wikipedia article included on this page is licensed under the GFDL.
Images may be subject to relevant owners' copyright.
All other elements are (c) copyright NationMaster.com 2003-5. All Rights Reserved.
Usage implies agreement with terms, 1022, m