Gresham’s law is an economic principle dealing with the circulation of money. The law states that “bad money tends to drive out good money.” It was named after Sir Thomas Gresham, an English treasury official of the 1500’s, though other people had observed the same principle earlier. It applies, for example, where coins have the same face value but hold different amounts of metal or metal of unequal worth. People will spend the lighter or cheaper coins (the “bad money”) before the heavier or more precious ones (the “good money”).
Gresham’s law often came into play in the past, when coins were made of gold, silver, or other precious metals. Dishonest people shaved slivers of valuable metal from the edges of coins before spending them. People who received the lighter coins passed them on quickly and saved any heavier ones they got.
Gold and silver were legal money in the United States during the late 1700’s and much of the 1800’s. Under this system, the value of gold coins in relation to silver ones was fixed by law. But the market price of gold and silver rose and fell in relation to demand for and availability of the metals. Gold coins usually were worth more than their face value, and silver coins usually worth less. As a result, people hoarded, melted down, or exported gold coins. Thus, gold disappeared from circulation.
In a related way, U.S. dimes and quarters minted in 1965 or later drove earlier dimes and quarters out of circulation. This occurred because the pre-1965 coins were made from more valuable metals.
