Economic law / monetary principle

Gresham's Law

When people are forced to treat unequal things as equal, they tend to pass on the lower-value one and keep the higher-value one.

Popularity

Usefulness

Aliases

Bad money drives out good / cheap money drives out dear money when both exchange at the same price

Domains

Economics, monetary history, currency systems, public finance, numismatics

Definition

Gresham's Law is the monetary principle that when two forms of money are legally accepted at the same nominal value but have different intrinsic or market values, the lower-value money tends to remain in circulation while the higher-value money is hoarded, melted down, or exported. (Encyclopedia Britannica)

People prefer to spend the overvalued or lower-quality money and keep the undervalued or higher-quality money.
A more precise version is: cheap money drives out dear money when both must be accepted at the same price.

Two currencies or coins circulate at the same official face value.
One has higher intrinsic value, such as more silver or gold content.
Buyers pay with the lower-value money because sellers or creditors must accept it at face value.
The higher-value money disappears from everyday circulation because people hoard it, melt it, or export it where its metal value is better recognized. (Encyclopedia Britannica)

If two one-dollar coins are both legal tender, but one contains silver worth more than one dollar and the other does not, people will tend to spend the cheaper coin and keep or sell the silver coin.

Example: The English debasement of coinage under Henry VIII and Edward VI, followed by Queen Elizabeth I's recoinage. Sir Thomas Gresham advised Elizabeth I on restoring confidence in debased currency, and his name later became associated with the principle. (Encyclopedia Britannica)
Why it fits this rule: Debased coins with lower metal content circulated, while better coins were withdrawn, hoarded, or exported.
Verification status: Partly verified. The historical debasement and Gresham's connection to Elizabethan currency reform are supported, but Thomas Gresham did not invent the universal law bearing his name; the phrase “Gresham’s Law” was coined later by Henry Dunning Macleod in 1858. (Cleveland Fed)

Legal-tender systems where two forms of money must be accepted at the same official value.
Debased coinage, clipped coins, or coins with different precious-metal content.
Bimetallic currency systems where the official gold-silver ratio differs from the market ratio.
Historical analysis of coin hoards and monetary circulation.
Some metaphorical uses, but only when lower-quality alternatives receive the same official status or acceptance as higher-quality alternatives.

Do not use it as a general claim that bad products always beat good products.
Do not apply it when people are free to price or reject the lower-quality money.
Do not confuse it with adverse selection; both involve quality differences, but Gresham's Law specifically depends on forced or fixed equivalence in exchange.
Do not state simply “bad money always drives out good”; that wording is catchy but incomplete and often misleading.

Invented by: Not clearly invented by Thomas Gresham. The idea appeared before him in earlier monetary writings, including medieval and Renaissance discussions.
Year of invention: Unknown. The name “Gresham’s Law” dates to Henry Dunning Macleod’s 1858 writing. (EH.net)
Country / context of origin: The named law is associated with England and Tudor-era currency debasement, but the underlying idea predates Gresham and appears in broader European monetary history. (EH.net)

The basis is mainly historical and theoretical monetary economics, especially cases involving debased coinage, legal tender rules, and bimetallic systems.
Economic historians and monetary economists treat the law as valid only under specific conditions: different intrinsic values, equal official exchange value, and incentives to spend the cheaper form of money.

When people are forced to treat unequal things as equal, they tend to pass on the lower-value one and keep the higher-value one.