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You're mixing up two things. Gresham's law applies when the conversation rate is fixed, not when it is set by the market. It's not the same as a currency being

by paulgb 8y ago

You're mixing up two things. Gresham's law applies when the conversation rate is fixed, not when it is set by the market. It's not the same as a currency being deflationary. Hayek wrote about the confusion: https://fee.org/resources/denationalization-of-money/#VI.%20THE%20CONFUSION%20ABOUT%20GRESHAM%E2%80%99S%20LAW https://fee.org/resources/denationalization-of-money/#VI.%20...

pjkundert 8y ago
Its original application was to coinage with a fixed face value and a fluctuating inherent (market) value, of course. The "spirit" of Gresham's law applies to any money that is (or is likely) to become more valuable in the future than it currently it. The same mental process applies in the holder of the money: "why would I spend this potentially more valuable money, when I have this other less valuable money to spend?" edit: the article mentions the German Weimar inflation as a counterexample; in fact, it is a prime example of this concept: if a vendor accepts either the Weimar Papiermark or the US Dollar as payment, who in their right mind would pay that vendor with US Dollars? That vendor would probably never see a single US Dollar in payment! Bad money would have totally chased out good, from their perspective. The real issue is not fixed exchange; in a free market, where vendors accept multiple forms of payment: unless forced, payors will always pay with "bad" money, and will keep the "good" money for themselves.
- paulgb 8y ago
  If the vendor is free to set the conversation rate, and it is generally acknowledged that the value of the Papiermark is falling, they will require more of it for the equivalent of a dollar. The aggregate effect of everyone doing this may inflate the Papiermark out of existence, but it has nothing to do with Gresham's law. In fact, it's the opposite effect, since the dollar would remain in circulation. If the vendor had to accept the Papiermark at a 1:1 rate, then nobody would pay with the dollar and then it would drive out the dollar. That would be Gresham's law.

by paulgb 8y ago

pjkundert 8y ago

Its original application was to coinage with a fixed face value and a fluctuating inherent (market) value, of course. The "spirit" of Gresham's law applies to any money that is (or is likely) to become more valuable in the future than it currently it. The same mental process applies in the holder of the money: "why would I spend this potentially more valuable money, when I have this other less valuable money to spend?" edit: the article mentions the German Weimar inflation as a counterexample; in fact, it is a prime example of this concept: if a vendor accepts either the Weimar Papiermark or the US Dollar as payment, who in their right mind would pay that vendor with US Dollars? That vendor would probably never see a single US Dollar in payment! Bad money would have totally chased out good, from their perspective. The real issue is not fixed exchange; in a free market, where vendors accept multiple forms of payment: unless forced, payors will always pay with "bad" money, and will keep the "good" money for themselves.

paulgb 8y ago
If the vendor is free to set the conversation rate, and it is generally acknowledged that the value of the Papiermark is falling, they will require more of it for the equivalent of a dollar. The aggregate effect of everyone doing this may inflate the Papiermark out of existence, but it has nothing to do with Gresham's law. In fact, it's the opposite effect, since the dollar would remain in circulation. If the vendor had to accept the Papiermark at a 1:1 rate, then nobody would pay with the dollar and then it would drive out the dollar. That would be Gresham's law.