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Gresham"s Law

Rosalie
Posts: 4,612
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12/17/2015 8:15:10 PM
Posted: 11 months ago
Now that I have completed this semester, and completed my Econ class, I feel the urge to talk about Gresham"s Law for some reason! The point of this forum will to discuss weather or not you belive this theory, or even provide your own theory.

So, what is "Gresham"s law"?

Greshman Law was a observation in economics that "bad money drives out good." More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham"s law in the 19th century.

Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the "inferior" money had driven it out.


Issues With the Theory.

I belive that the statment "Bad money drives out good money" is a complete mistake. Infact, it should be "Good money drives out Bad money" this is the more correct empirical proposition. Historically, it has been good, strong currencies that have driven out bad, weak currencies. Over a millenia of years, the stronger currencies have dominated and driven out the weak in international competition.

The Persian daric, the Greek tetradrachma, the Macedonian stater, and the Roman denarius did not become dominant currencies of the ancient world because they were "bad" or "weak." The florins, ducats and sequins of the Italian city-states did not become the "dollars of the Middle Ages" because they were bad coins; they were among the best coins ever made. The pound sterling in the 19th century and the dollar in the 20th century did not become the dominant currencies of their time because they were weak. Consistency, stability and high quality have been the attributes of great currencies that have won the competition for use as international money.

If Gresham's Law could be rendered coherently as "bad money drives out good" it would have no claim to our attention as a serious proposition of economics. On the contrary, it is a completely false generalization, and an invalid rendering of Gresham's Law.
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
Robkwoods
Posts: 576
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12/17/2015 8:59:10 PM
Posted: 11 months ago
At 12/17/2015 8:15:10 PM, Rosalie wrote:
Now that I have completed this semester, and completed my Econ class, I feel the urge to talk about Gresham"s Law for some reason! The point of this forum will to discuss weather or not you belive this theory, or even provide your own theory.

So, what is "Gresham"s law"?

Greshman Law was a observation in economics that "bad money drives out good." More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham"s law in the 19th century.

Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the "inferior" money had driven it out.


Issues With the Theory.

I belive that the statment "Bad money drives out good money" is a complete mistake. Infact, it should be "Good money drives out Bad money" this is the more correct empirical proposition. Historically, it has been good, strong currencies that have driven out bad, weak currencies. Over a millenia of years, the stronger currencies have dominated and driven out the weak in international competition.

The Persian daric, the Greek tetradrachma, the Macedonian stater, and the Roman denarius did not become dominant currencies of the ancient world because they were "bad" or "weak." The florins, ducats and sequins of the Italian city-states did not become the "dollars of the Middle Ages" because they were bad coins; they were among the best coins ever made. The pound sterling in the 19th century and the dollar in the 20th century did not become the dominant currencies of their time because they were weak. Consistency, stability and high quality have been the attributes of great currencies that have won the competition for use as international money.

If Gresham's Law could be rendered coherently as "bad money drives out good" it would have no claim to our attention as a serious proposition of economics. On the contrary, it is a completely false generalization, and an invalid rendering of Gresham's Law.

https://www.youtube.com...

That's all I have for now :(
ColeTrain
Posts: 4,320
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12/17/2015 11:30:15 PM
Posted: 11 months ago
At 12/17/2015 8:15:10 PM, Rosalie wrote:
Now that I have completed this semester, and completed my Econ class, I feel the urge to talk about Gresham"s Law for some reason! The point of this forum will to discuss weather or not you belive this theory, or even provide your own theory.

Cool. :)

So, what is "Gresham"s law"?

"bad money drives out good." More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation.

Never really heard of the law before (at least by name) but the concept is feasible.

Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the "inferior" money had driven it out.

Yeah, yeah ;) (I don't really wanna respond to this, specifically)

Issues With the Theory.

I belive that the statment "Bad money drives out good money" is a complete mistake. Infact, it should be "Good money drives out Bad money" this is the more correct empirical proposition.

By appearance, this seems true. But by your definition/clarification of Gresham's Law... it's a little odd.

Historically, it has been good, strong currencies that have driven out bad, weak currencies.

This is true: but how is it applicable to the law's specifics? (i.e. cheaper money drives out expensive money). Personally, I'd think that the cheaper money (if worth the same) would be the obvious and clear choice, even if it's objectively *worse.* Simply because it won't cost as much to produce but still warrants the same monetary value, it would crowd out more expensive currencies.

Over a millenia of years, the stronger currencies have dominated and driven out the weak in international competition.

Depending on your definition of *strong,* this is true.

[...]

If Gresham's Law could be rendered coherently as "bad money drives out good" it would have no claim to our attention as a serious proposition of economics. On the contrary, it is a completely false generalization, and an invalid rendering of Gresham's Law.

From what I've seen/read, you're right -- *bad* money cannot drive out *good* money, if we're talking about monetary value, supply/demand of currency resources, etc. Otherwise, though *bad* money, as you mentioned earlier (being of less quality/cheaper) CAN drive out *good* money (being more pricey).
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Stefanwaal
Posts: 54
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12/18/2015 11:45:49 AM
Posted: 11 months ago
Rosalie, I get the impression you didn't read what Gresman meant with 'good' money and 'bad' money.

When Gresman talks about 'good' and 'bad' money he's talking about physical coins. Not a currency like the dollar or the euro. Coins like this: http://www.falconecoins.com...

'Good' money is a coin that has the same face value as nominal value. What this means is that when you melt down a coin, the metal is worth same same as the coin you started with. So let's say you have a $1 coin that's made out of pure gold. That coin is worth $1 obviously. Now let's melt it down and sell the gold as a raw resource. If you can get $1 for the gold it's 'good' money. If you get less (like $0.10) it's 'bad' money.

An example of 'bad' money is the $100 dollar bill. https://upload.wikimedia.org...
This bill is made out of paper. If you would sell this bill on the paper market you would get maybe $0.01 from it. That's way less than the $100 value that's on the bill.

Now let's talk more directly about the topic with a kritik. I believe Gresham's law is a law that has no practical use in the modern world. In the modern world most of the transactions are with digital cash. Digital cash exists out of ones and zeros. Those have no intrinsic value, so digital cash is 'bad' money. Since digital money is so convenient while physical coins are less convenient I see no reason to go back from our 'bad' money to 'good' money.
ClaesTheilgaard
Posts: 9
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12/19/2015 9:42:27 AM
Posted: 11 months ago
At 12/18/2015 11:45:49 AM, Stefanwaal wrote:
Rosalie, I get the impression you didn't read what Gresman meant with 'good' money and 'bad' money.

When Gresman talks about 'good' and 'bad' money he's talking about physical coins. Not a currency like the dollar or the euro. Coins like this: http://www.falconecoins.com...

'Good' money is a coin that has the same face value as nominal value. What this means is that when you melt down a coin, the metal is worth same same as the coin you started with. So let's say you have a $1 coin that's made out of pure gold. That coin is worth $1 obviously. Now let's melt it down and sell the gold as a raw resource. If you can get $1 for the gold it's 'good' money. If you get less (like $0.10) it's 'bad' money.

An example of 'bad' money is the $100 dollar bill. https://upload.wikimedia.org...
This bill is made out of paper. If you would sell this bill on the paper market you would get maybe $0.01 from it. That's way less than the $100 value that's on the bill.

Now let's talk more directly about the topic with a kritik. I believe Gresham's law is a law that has no practical use in the modern world. In the modern world most of the transactions are with digital cash. Digital cash exists out of ones and zeros. Those have no intrinsic value, so digital cash is 'bad' money. Since digital money is so convenient while physical coins are less convenient I see no reason to go back from our 'bad' money to 'good' money.

I agree. Good with some clarification here. Gresham's Law has little to no use in modern day society, for the reasons you mentioned. But the theory still stands for some quite interesting thoughts, nevertheless.
ResponsiblyIrresponsible
Posts: 12,398
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1/24/2016 6:23:48 PM
Posted: 10 months ago
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.
~ResponsiblyIrresponsible

DDO's Economics Messiah
Rosalie
Posts: 4,612
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1/24/2016 8:04:53 PM
Posted: 10 months ago
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
Rosalie
Posts: 4,612
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1/24/2016 8:11:08 PM
Posted: 10 months ago
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

Thank you. :)
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
ResponsiblyIrresponsible
Posts: 12,398
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1/24/2016 8:59:10 PM
Posted: 10 months ago
At 1/24/2016 8:04:53 PM, Rosalie wrote:
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?

It's product placement--not that hard to figure out.
~ResponsiblyIrresponsible

DDO's Economics Messiah
Rosalie
Posts: 4,612
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1/24/2016 9:00:56 PM
Posted: 10 months ago
At 1/24/2016 8:59:10 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 8:04:53 PM, Rosalie wrote:
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?

It's product placement--not that hard to figure out.

Well, I didn't want to click on it..
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
ResponsiblyIrresponsible
Posts: 12,398
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1/24/2016 9:01:21 PM
Posted: 10 months ago
At 1/24/2016 9:00:56 PM, Rosalie wrote:
At 1/24/2016 8:59:10 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 8:04:53 PM, Rosalie wrote:
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?

It's product placement--not that hard to figure out.

Well, I didn't want to click on it..

You shouldn't.
~ResponsiblyIrresponsible

DDO's Economics Messiah
dylancatlow
Posts: 12,251
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1/24/2016 9:34:35 PM
Posted: 10 months ago
I don't see why Gresham's law should always apply. Sure, if the material used in currency is more valuable than the currency itself than people will smelt it down and sell it for profit, even if it's illegal. That's just a straightforward example of people acting in their self-interest. But if the face value of, say, gold coins is greater than the value of the gold itself, and will remain so for the foreseeable future, then there's no benefit to hoarding gold currency as opposed to silver currency since they both have equal value. You would only have incentive to place a higher value on gold currency if you thought that the face value of gold coins would eventually be surpassed by the value of the gold itself. That actually has to happen someday.
Rosalie
Posts: 4,612
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1/24/2016 9:56:18 PM
Posted: 10 months ago
At 1/24/2016 9:01:21 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 9:00:56 PM, Rosalie wrote:
At 1/24/2016 8:59:10 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 8:04:53 PM, Rosalie wrote:
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?

It's product placement--not that hard to figure out.

Well, I didn't want to click on it..

You shouldn't.

You wouldn't believe some of the links I've accidently clicked on....
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
ResponsiblyIrresponsible
Posts: 12,398
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1/24/2016 10:25:16 PM
Posted: 10 months ago
At 1/24/2016 9:56:18 PM, Rosalie wrote:
At 1/24/2016 9:01:21 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 9:00:56 PM, Rosalie wrote:
At 1/24/2016 8:59:10 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 8:04:53 PM, Rosalie wrote:
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?

It's product placement--not that hard to figure out.

Well, I didn't want to click on it..

You shouldn't.

You wouldn't believe some of the links I've accidently clicked on....

Nothing surprises me anymore.
~ResponsiblyIrresponsible

DDO's Economics Messiah
Rosalie
Posts: 4,612
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1/24/2016 10:27:28 PM
Posted: 10 months ago
At 1/24/2016 10:25:16 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 9:56:18 PM, Rosalie wrote:
At 1/24/2016 9:01:21 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 9:00:56 PM, Rosalie wrote:
At 1/24/2016 8:59:10 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 8:04:53 PM, Rosalie wrote:
At 1/24/2016 6:23:48 PM, ResponsiblyIrresponsible wrote:
At 1/24/2016 6:20:58 PM, Melo wrote:
Your post is good, it's short and quite informative.

I see that ad spammers are becoming more creative these days.

Let me be blunt: get the fck out.

His sig?

It's product placement--not that hard to figure out.

Well, I didn't want to click on it..

You shouldn't.

You wouldn't believe some of the links I've accidently clicked on....

Nothing surprises me anymore.

Rick Astley
. :p
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16