Gresham's Law

Gresham's law is the monetary principle that bad money drives out good: when two forms of money must be accepted at the same face value, people spend the overvalued one and hoard the undervalued one. Named for Tudor financier Sir Thomas Gresham, the effect appears wherever legal tender rules fix an exchange rate that markets disagree with.

Why it matters

Gresham's law explains why sound money disappears from circulation rather than coexisting with debased money. The cleanest modern example is US coinage: quarters and dimes minted through 1964 were 90 percent silver, and once the metal became worth more than face value, the public stripped them from circulation within a few years, leaving only the copper-nickel replacements. The same dynamic emptied circulating gold coin from economies that inflated their paper. The law's often-omitted condition matters: it operates only where authorities compel acceptance at par. In free exchange the opposite occurs, and good money outcompetes bad, a corollary sometimes called Thiers' law.

In the gold vs bitcoin debate

Both assets live on the hoarded side of Gresham's ledger. People spend fiat currency and save in gold or bitcoin, which is why critics observing that bitcoin is rarely used for coffee are describing Gresham's law in action rather than a failure of the asset. The pattern holds historically for gold and behaviorally for bitcoin holders today: the money expected to appreciate is the money kept, and the money expected to depreciate is the money passed on. The law also predicts what would happen if either asset were ever forced into circulation at a fixed rate against fiat.